Rough N\' Tough manufactures outdoors accessories. Management is considering pro
ID: 2555301 • Letter: R
Question
Rough N' Tough 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 is currently producing at full capacity, and they would need to invest in new manufacturing equipment that could be used to manufacture the poles. The manufacturing equipment would cost $50,000, and it is estimated that it would last long enough to produce 20,000 sets of poles.
What would be the total cost difference if the company produced the poles rather than purchasing them?
Explanation / Answer
Solution:
Cost of manufacturing equipment to produce poles = $50,000
Expected production of poles = 20000 sets
Avoidable fixed overhead if company buy poles = $50,000 / 20000 = $2.50 per set of poles
Cost of buying set of poles = $60 per set
cost difference per unit of buying and making alternative = $60 - $59.50 = $0.50 per unit
Total cost difference if the company produced the poles rather than purchasing them = 20000*$0.50 = $10000
Computation of relevant cost to produce poles - Rough N Tough Particulars Per unit Direct material $40.00 Direct labor $10.00 Variable manufacturing overhead $7.00 Avoidable fixed overhead $2.50 Relevant cost per unit $59.50Related Questions
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