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 includes $ 78,000 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 to make the sails," she says, "but only $ 250 to buy them. Should I continue buying them, or have I missed something?"

Question

Business

Rambo

10 June, 21:40

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 includes $ 78,000 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 to make the sails," she says, "but only $ 250 to buy them. Should I continue buying them, or have I missed something?"

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Answers (1)

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Bella Garrett · Answer 1

It is more convenient to produce the sails in house.

Explanation:

Giving the following information:

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 includes $ 78,000 of annual fixed overhead that is allocated using normal capacity.

Because there will not be an increase in fixed costs, we will not have them into account.

Variable overhead = 90 - (78,000/1,200) = 25

Unitary variable cost = 100 + 80 + 25 = 205

It is more convenient to produce the sails in house.