E7-7 Riggs Company
purchases sails and produces sailboats. It currently produces 1,200 sailboats
per year, operating at normal capacity, which is about 80% of full capacity.
Riggs purchases sails at $250 each, but the company is considering using the
excess capacity to manufacture the sails instead. The manufacturing cost per
sail would be $100 for direct materials, $80 for direct labor, and $90 for
overhead. The $90 overhead is based on $78,000 of annual fixed overhead that is
allocated using normal capacity.
Instructions
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
The president of Gibbs has come to you for advice. “It would
cost me $270 to make the sails,” she says, “but only $250 to buy them. Should I
continue buying them, or have I missed something?”
Instructions
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
(b) If Riggs suddenly finds an opportunity to rent out the
unused capacity of its factory for $77,000 per year, would your answer to part
(a) change? Briefly explain.
(c) Identify three qualitative factors that should be considered
by Riggs in this make-or-buy decision. (CGA adapted)
TUTORIAL PREVIEW
(a)
Net Income
Increase
|
|||
Make Sails
|
Buy Sails
|
(Decrease)
|
|
Direct material
|
$100
|
$ 0
|
$ 100
|
Direct labor
|
80
|
0
|
80
|
Variable overhead
|
35
|
0
|
35
|
File name: E7-7 Riggs
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