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E7-7
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?‖
Instructions
a. Prepare a per unit analysis of the differential costs. Briefly
explain whether Riggs should make or buy the sails.
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? Briefly explain.
E7-11
Kirk Minerals processes materials extracted from mines. The
most common raw material that it processes results in three
joint products: Spock, Uhura, and Sulu. Each of these products
can be sold as is, or each can be processed further and sold for
a higher price. The company incurs joint costs of $180,000 to
process one batch of the raw material that produces the three
joint products. The following cost and sales information is
available for one batch of each product.