MODULE 4 - SHORT TERM BUSINESS DECISIONS. QUESTION 1 - MAKE OR BUY DECISION Gibbs 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. Gibbs 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 labour, and $100 for overhead. The $100 overhead is based on $78,000 of annual fixed overhead that is allocated using normal capacity. The president of Gibbs has come to you for advice. "It would cost me $280 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 Gibbs should make or buy the sails. b) if Gibbs 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 Gibbs in this make-or-buy decision. QUESTION 2 - CONTINUE OR ELIMINATE Judy Jean, a recent graduate of Rolling's accounting program, evaluated the operating performance of Artie Company's six divisions. Judy made the following presentation to Artie's board of directors and suggested the Huron Division be eliminated. "If the Huron Division is eliminated," she said, "our total profits would increase by $26,000." The Other Huron Five Divisions Division Total Sales $1,664,200 $100,000 $1.764,200 Cost of goods sold 978,520 76,000 1,054,520 Gross profit 685.680 24,000 709,680 Operating expenses 527.940 50,000 577.940 Net income $ 157,740 $(26,000) $ 131,740 In the Huron Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $26,000 variable and $24,000 fixed. None of the Huron Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Judy right about eliminating the Huron Division? Prepare a schedule to support your