The Sail Company purchase sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at 80% of capacity. Currently, the Sail Company purchases sails at $260 each, but the company is considering manufacturing the sails instead. The total manufacturing cost per sail would be $100 for materials, $80 for direct labour, and $100 for overhead. If the company made sails, it would operate at full capacity.

Sam Dale, the President of the Sail Company, has come to you for advice. It would cost me $280 to make the sails, he said, but only $260 to buy. Should I continue buying them or am I missing something? He added, Materials and labour are variable costs, but variable overhead would be only $40 per sail.

Required

1. Prepare an analysis to show Sam what he should do.
2. If Sam suddenly finds an opportunity to rent out the unused capacity of his factory for $80,000 per year, would your answer to requirement (a) change? Why or why not?