QUESTION - 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 $ 257 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 94.05 for direct materials, $ 86.30 for direct labor, and $ 90 for overhead. The $ 90 overhead includes $ 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 $ 270.35 to make the sails," she says, "but only $ 257 to buy them. Should I continue buying them, or have I missed something?"
Required - Prepare a per unit analysis of the differential costs.