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 is based on $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?”
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 is based on $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?”
Chapter10: Short-term Decision Making
Section: Chapter Questions
Problem 4EB: Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all...
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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 is based on $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?”
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?”
(B) If Riggs 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?
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