3. RNT manufactures outdoors accessories. Management is considering producing th

ID: 2571253 • Letter: 3

Question

3. 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 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

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

Direct materials

$40

Direct labor

$10

Variable overhead

Fixed overhead

$20

Depreciation per set

$2.5

Total cost of manufacturing

$79.5

As it is given in the question that cost of purchasing a set of poles is $60

Thus difference between purchasing and manufacturing costs will be;

($79.5 – $60) = $19.5

Working Note;

Depreciation per set is calculated as follow;

$50000 / 20000 = $2.5 per set of poles