Question

Rough N' Tough (RNT) manufactures outdoors accessories. Management is considering producing the poles for their tents rather than continuing to purchase from their current supplier. The supplier charges $60 per set of poles.

The cost accounting team has estimated that RNT would incur the following costs if they were to produce the poles instead: $40 per set for direct materials, $10 per set for direct labor, $7 per set for variable overhead, and $20 per set for fixed overhead application.

RNT currently has unused production capacity and manufacturing equipment that could be used to manufacture the poles. RNT has planned to sell 5,000 tents this year.

What would the change in overall cost be for the company if RNT produced the poles rather than purchasing them?

Answer 1

Ans:

Cost of producing the poles per set, will be calculated as follow;

Direct materials	$40
Direct labor	$10
Variable overhead	$7
Fixed overhead (un avoidable)	--
Total cost of manufacturing	$57

cost of purchasing a set of poles from out side supplier is $60

The change in overall cost be for the company if RNT produced the poles rather than purchasing them is

($60-$57)*5,000tents = $15,000

Note:

The company used its spare capacity to produce poles so fixed overhead allocation cost is not considered for Decision making