Question

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 rull 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 590 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? (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 7 the sails. Click if you would like to Show Work for this question: Open Show Work Attempts: 0 of 5 used SAVE FOR LATER SUBMIT ANSWER (b) The parts of this question must be completed in order. This part will be available when you complete the part above.

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?”

(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.

Answer 1

Solution a:

16 17 Direct Material Direct Labor Variable overhead ($90 - $78400/1210) Purchase Price Total Unit Cost Make sails $93.39 $86.65 $25.21 $0.00 $205.25 Buy sails $0.00 $0.00 $0.00 $254.00 $254.00 Net Income Increase (Decrease) $93.39 $86.65 $25.21 -$254.00 $48.75 21 22 23 24 25 26 27 28 29 31 32 33 34 et102 ) Sheet103 ) Sheet104 ) Sheet105 Sheet106 Sheet291 (3) Sheet108 Sheet107 111 0 <

Solution b:

Riggs should make the sails.