Exercise 20-7 Riggs Company purchases sails and produces sailboats. It currently
ID: 2539956 • Letter: E
Question
Exercise 20-7
Riggs Company purchases sails and produces sailboats. It currently produces 1,280 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $255 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $96.98 for direct materials, $87.16 for direct labor, and $90 for overhead. The $90 overhead includes $78,100 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. “It would cost me $274.14 to make the sails,” she says, “but only $255 to buy them. Should I continue buying them, or have I missed something?”
the sails.
Exercise 20-10
Exercise 20-14
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
If sold now, the current machine would have a salvage value of $10,100. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.
Should the current machine be replaced? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Problem 20-1A
Exercise 20-7
Riggs Company purchases sails and produces sailboats. It currently produces 1,280 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $255 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $96.98 for direct materials, $87.16 for direct labor, and $90 for overhead. The $90 overhead includes $78,100 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. “It would cost me $274.14 to make the sails,” she says, “but only $255 to buy them. Should I continue buying them, or have I missed something?”
Explanation / Answer
Make Buy Net income Increasse/(Decrease) Material @$96.98 per unit 124134.4 124134.4 Labour @$87.16 per unit 111564.8 111564.8 Variable OH 37100 37100 Purchase Price 326400 -326400 Total Unit cost 213.124 255 -53600.8 As, the net income decreases with the purchasse of units from supplier. The company should MAKE THE PRODUCT
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