Exercise 7-7 a-b (Part Level Submission) (Video) Riggs Company purchases sails a

Question

Exercise 7-7 a-b (Part Level Submission) (Video) Riggs Company purchases sails and produces sailboats. It currently produces 1,250 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $253 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $94 for direct materials, $81 for direct labor, and $90 for overhead. The $90 overhead is based on $78,750 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. “It would cost me $265 to make the sails,” she says, “but only $253 to buy them. Should I continue buying them, or have I missed something?” Collapse question part (a) Correct answer. Your answer is correct. Prepare a per unit analysis of the differential costs. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Sails Buy Sails Net Income Increase (Decrease) Direct material $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer Direct labor Entry field with correct answer Entry field with correct answer Entry field with correct answer Variable overhead Entry field with correct answer Entry field with correct answer Entry field with correct answer Purchase price Entry field with correct answer Entry field with correct answer Entry field with correct answer Total unit cost $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer Should Riggs make or buy the sails? Riggs should Entry field with correct answer the sails. Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT Attempts: 2 of 2 used Collapse question part (b) Partially correct answer. Your answer is partially correct. Try again. If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $79,700 per year, would your answer to part (a) change? Entry field with correct answer. This is because the net income will Entry field with correct answer by $Entry field with incorrect answer. Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Make Sails Buy Sails Net Income Increase (Decrease) Direct materials 94 94 Direct labor 81 81 Variable overhead 27 27 Purchase cost 253 -253 Total cost 202 253 -51 Riggs should make the sails b Change in net income=79700-(1250*51)=$15950 The net income will increase by $15950

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