Question

Novak Company purchases sails and produces sailboats. It currently produces 1,290 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Novak purchases sails at $273 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $91.59 for direct materials, $85.99 for direct labor, and $90 for overhead. The $90 overhead is based on $78,100 of annual fixed overhead that is allocated using normal capacity. The president of Novak has come to you for advice. “It would cost me $267.58 to make the sails,” she says, “but only $273 to buy them. Should I continue buying them, or have I missed something?” Prepare a per unit analysis of the differential costs. (Round answers to 2 decimal places, e.g. 15.25. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Sails Buy Sails Net Income Increase (Decrease) Direct material $ $ $ Direct labor Variable overhead Purchase price Total unit cost $ $ $ Should Novak make or buy the sails? Novak should the sails. If Novak suddenly finds an opportunity to rent out the unused capacity of its factory for $77,000 per year, would your answer to previous part change? . This is because the net income will by $.

Answer 1

Solution 1:

Particulars	Make Sails	Buy Sails	Net income Increase (Decrease)
Direct materials	$91.59	$0.00	$91.59
Direct labor	$85.99	$0.00	$85.99
Variable overhead ($90 - $78,100/1290)	$29.46	$0.00	$29.46
Purchase price	$0.00	$273.00	-$273.00
Total unit cost	$207.04	$273.00	-$65.96

Novak should make the sails.

Solution 2:

Particulars	Make Sails	Buy Sails	Net income Increase (Decrease)
Direct materials	$91.59	$0.00	$91.59
Direct labor	$85.99	$0.00	$85.99
Variable overhead ($90 - $78,100/1290)	$29.46	$0.00	$29.46
Purchase price	$0.00	$273.00	-$273.00
Opportunity cost	$0.00	-$59.69	$59.69
Total unit cost	$207.04	$213.31	-$6.27

Still make cost is lower than buying cost, therefore novak should make the sails.