Exercise 20-07 a-b

Riggs Company purchases sails and produces sailboats. It currently produces 1,270 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $262 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $97 for direct materials, $88 for direct labor, and $90 for overhead. The $90 overhead is based on $78,740 of annual fixed overhead that is allocated using normal capacity.

The president of Riggs has come to you for advice. "It would cost me $275 to make the sails," she says, "but only $262 to buy them. Should I continue buying them, or have I missed something?"

Prepare a per unit analysis of the differential costs. (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 $Entry field with incorrect answer

$Entry field with incorrect answer

$Entry field with incorrect answer

Direct labor Entry field with incorrect answer

Entry field with incorrect answer

Entry field with incorrect answer

Variable overhead Entry field with incorrect answer

Entry field with incorrect answer

Entry field with incorrect answer

Purchase price Entry field with incorrect answer

Entry field with incorrect answer

Entry field with incorrect answer

Total unit cost $Entry field with incorrect answer

$Entry field with incorrect answer

$Entry field with incorrect answer now contains modified data

Should Riggs make or buy the sails?

Riggs should Entry field with incorrect answer now contains modified data the sails.