Question
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
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 $135,000 per year.
Alternative 2 : Purchase the drums from an outside supplier at $18 per drum.
The new equipments capacity would be 90,000 drums per year and has the following cost data:
per unit | per year | ||
Direct materials | $ | 10.35 | |
Direct labor | 4.20 | ||
Variable overhead | 1.05 | ||
General company overhead | 168,000 | ||
Supervision | 45,000 | ||
The companys total general company overhead would be unaffected by this decision. Supervision cost could be avoided if purchase the drums from an outside supplier.
Question: Assuming that 90,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
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