Gibbs Company purchases sails and produces sailboats. It currently produces 1,239 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Gibbs purchases sails at $252.00 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $94.70 for direct materials, $87.00 for direct labor, and $100 for overhead. The $100 overhead is based on $78,220 of annual fixed overhead that is allocated using normal capacity.
The president of Gibbs has come to you for advice. "It would cost me $281.70 to make the sails," she says, "but only $252.00 to buy them. Should I continue buying them, or have I missed something?"
Prepare a per unit analysis of the differential costs. (Round answers to 2 decimal places, e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
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Make Sails |
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Buy Sails |
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Net Income
Increase (Decrease) |
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| Direct material |
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$ |
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$ |
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$ |
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| Direct labor |
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| Variable overhead |
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| Purchase price |
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| Total unit cost |
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$ |
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$ |
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$ |
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Should Gibbs make or buy the sails?
BuyMake
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If Gibbs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,950 per year, would your answer to part (a) change?
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