Riggs Company purchases sails and produces sailboats. It currently produces 1,250 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $256 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $90.54 for direct materials, $89.54 for direct labor, and $90 for overhead. The $90 overhead includes $78,500 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. It would cost me $270.08 to make the sails, she says, but only $256 to buy them. Should I continue buying them, or have I missed something?

Prepare a per unit analysis of the differential costs.

If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $78,000 per year, would your answer to part (a) change?