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Gibbs Sailboats

Price: $1.99


Gibbs 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. Gibbs
purchases sails at $250 each, but the company is considering using the excess capacity to
manufacture the sails instead. The manufacturing cost per sail would be $100 for direct
materials, $80 for direct labor, and $100 for overhead. The $100 overhead is based on
$78,000 of annual fixed overhead that is allocated using normal capacity.
The president of Gibbs has come to you for advice. “It would cost me $280 to make
the sails,” she says, “but only $250 to buy them. Should I continue buying them, or have I
missed something?”

Instructions
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Gibbs
should make or buy the sails.
(b) If Gibbs suddenly finds an opportunity to rent out the unused capacity of its factory
for $77,000 per year, would your answer to part (a) change?

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