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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.
Sales Value at
Sales Value of