$1$

$"$In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managing director of Antilles Refining, N$.$V$.,$ of Aruba. $"$At a price of $132$ florins per drum, we would be paying $10$ florins less than it costs us to manufacture the drums in our own plant. Since we use $340,000$ drums a year, we would save $3,400,000$ florins on an annual basis." $($The currency in Aruba is the florin, denoted by Afl.$)$ Antilles Refining's present cost to manufacture one drum follows $($based on $340,000$ drums per year$)$:

$01$:$12$:$53$

eBook

$\backslash$table$[[$Direct material,Afl $36\mathrm{.}70],[$Direct labour,$28\mathrm{.}00],[$Variable overhead,$19\mathrm{.}00],[$Fixed overhead $($Af $121\mathrm{.}60$ general company overhead, Afl$19\mathrm{.}20,],[\backslash$table$[[$depreciation and, Afl$17\mathrm{.}50$ supervision$)],[$Total cost per drum$]],]]$

A decision about whether to make or buy the drums is especially important at this time, since the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are as follows:

Alternative $1$: Purchase new equipment and continue to make the drums. The equipment would cost Afl$4,590,000$; it would have a six$-$year useful life and no salvage value. The company uses straight$-$line depreciation.

Alternative $2$: Purchase the drums from an outside supplier at Afl$132$ per drum under a six$-$year contract.

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labour and variable overhead costs by $30\%.$ The old equipment has no resale value. Supervision cost $($Afl$5,950,000$ per year$)$ and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be $5,950,000$ drums per year. The company has no other use for the space being used to produce the drums.

The company's total general company overhead would be unaffected by this decision. Calculate the total cost and costs per drum under two alternatives. Assume that $340000$ drums are needed each year. Should the company make or buy based on analysis.