4. Award: 6.25 points \"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 $19 per drum, we would be paying $5.35 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $321,000.\" Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead ($3.00 general company overhead, $1.70 depreciation, and, $0.70 supervision) Total cost per drum $10.45 7.00 1.50 5.40 $24.35 A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are: Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $168,000 per year. Alternative 2: Purchase the drums from an outside supplier at $19 per drum. The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 20%. The old equipment has no resale value. Supervision cost ($42,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 140,000 drums per year. The company's total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.) Required: 1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 2. Assuming that 120,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? (For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations.) Production Needs 1. 60,000 drums 2. 120,000 drums 3. 140,000 drums Financial advantage (disadvantage) of buying the drums References Worksheet Difficulty: 2 Medium Learning Objective: 06-03 Prepare a make or buy analysis. 2. Award: 6.25 points (Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into filet mignon and the New York cut. If the T-bone steaks are sold as initially cut, the company figures that a 1-pound T-bone steak would yield the following profit: Selling price ($2.30 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product Profit per pound $ 2.30 1.30 $ 1.00 If the company were to further process the T-bone steaks, then cutting one side of a T-bone steak provides the let mignon and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce let mignon and one 8-ounce New York cut; the remaining ounces are waste. It costs $0.12 to further process one T-bone steak into the let mignon and New York cuts. The let mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.20 per pound. Required: 1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? 2. Would you recommend that the T-bone steaks be sold as initially cut or processed further? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) per unit Required 1 Required 2 References Worksheet Difficulty: 1 Easy Learning Objective: 06-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further. 3. Award: 6.25 points Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company's Grit 337 and its Sparkle silver polish. Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.20 a pound to make, and it has a selling price of $7.00 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $5.00 per jar. This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct variable costs involved in the processing of a jar of silver polish are: Other ingredients Direct labor Total direct cost $ 0.65 1.32 $ 1.97 Overhead costs associated with processing the silver polish are: Variable manufacturing overhead cost Fixed manufacturing overhead cost (per month) Production supervisor Depreciation of mixing equipment 25% of direct labor cost $ 3,400 $ 1,400 The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 10,500 jars of polish per month. Its resale value is negligible and it does not wear out through use. Advertising costs for the silver polish total $3,600 per month. Variable selling costs associated with the silver polish are 5% of sales. Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder. Required: 1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.) 2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.) 3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.) 4. If the company sells 8,700 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.) 5. If the company sells 11,900 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.) 1. Incremental revenue per jar 2. Incremental contribution margin per jar 3. Number of jars that must be sold per month 4. Financial advantage (disadvantage) 5. Financial advantage (disadvantage) References Worksheet Difficulty: 3 Hard Learning Objective: 06-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further