Question

Exercise 20-7 (Part Level Submission) Riggs Company purchases sails and produces sailboats. It currently produces 1,210 sailb

Exercise 20-7 (Part Level Submission)

Riggs Company purchases sails and produces sailboats. It currently produces 1,210 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $254 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $93.39 for direct materials, $86.65 for direct labor, and $90 for overhead. The $90 overhead includes $78,400 of annual fixed overhead that is allocated using normal capacity.

The president of Riggs has come to you for advice. “It would cost me $270.04 to make the sails,” she says, “but only $254 to buy them. Should I continue buying them, or have I missed something?”

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(a)

Prepare a per unit analysis of the differential costs. (Round answers to 2 decimal places, e.g. 15.75. Enter negative amounts 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 Riggs make or buy the sails?
Riggs should

buymake

the sails.
0 0
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Answer #1

Solution a:

16 17 Direct Material Direct Labor Variable overhead ($90 - $78400/1210) Purchase Price Total Unit Cost Make sails $93.39 $86

Solution b:

Riggs should make the sails.

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