4 "In my oplnion, we ought to stop making our own drums and accept that outside supplier's offer," sald Wim Nlewindt, managing director of Antilles Refining, N.V., of Aruba. "At a price of $21 per drum, we would be paying $6.00 less than it costs us to manufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $420,000 Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year Direat materials $11.00 Direct abor Print 8.50 Variabla overhead 1.25 Fixed uverhead ($3.30 general company overhead, $1.85 depreciation, and $1.10 supervision) 6.25 $27.00 Total coat per drum 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 $231,000 per year. Alternative 2: Purchase the drums from an outside supplier at $21 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 ($77,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 175,000 drums per year. The company's total general company overhead would be unaffected by this decision. Required: 1. Assuming that 70,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside suppller? 2. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 175,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier