Carla Vista Company purchases sails and produces sailboats. It currently produces 1,260 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Carla Vista purchases sails at $254 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $95 for direct materials, $80 for direct labor, and $90 for total manufacturing overhead. The $90 total manufacturing overhead includes $78,120 of annual fixed overhead that is allocated using normal capacity.
Carla Vista Company purchases sails and produces sailboats. It currently produces 1,260 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Carla Vista purchases sails at $254 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $95 for direct materials, $80 for direct labor, and $90 for total manufacturing overhead. The $90 total manufacturing overhead includes $78,120 of annual fixed overhead that is allocated using normal capacity.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Carla Vista Company purchases sails and produces sailboats. It currently produces 1,260 sailboats per year, operating at normal
capacity, which is about 80% of full capacity. Carla Vista purchases sails at $254 each, but the company is considering using the excess
capacity to manufacture the sails instead. The manufacturing cost per sail would be $95 for direct materials, $80 for direct labor, and
$90 for total manufacturing overhead. The $90 total manufacturing overhead includes $78,120 of annual fixed overhead that is
allocated using normal capacity.
The president of Carla Vista has come to you for advice. "It would cost me $265 to make the sails," she says, "but only $254 to buy
them. Should I continue buying them, or have I missed something?"
(a)
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
$
Direct labor
Variable overhead
Purchase price
Total unit cost
$
Should Carla Vista make or buy the sails?
Carla Vista should
the sails.
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