"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 $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): $11.88 8.5e 1.25 Direct materials Direct labor Variable overhead Fixed overhead ($3.30 general company overhead, $1.85 depreciation, and, $1.10 supervision) Total cost per drum 6.25 $ 27.80 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. (Note from Dr. M: If the company stopped making the drums, they would lay off the supervisor. The paragraph above says that DM cost per drum and supervisor costs would not be affected by the new equipment. This means that, IF the company leases the new equipment and makes the drums, the DM cost per drum and supervisory cost would be the same as it currently is. But IF the company stops making the drums, then the DM cost per drum and supervisory costs would be eliminated.) The company's total general company overhead would be unaffected by this decision. (Round all Intermediate calculations to 2 decimal places.) Required: 1. To assist the managing director in making a decision, prepare an analysis showing the total cost and the cost per drum for each of the two alternatives given above. Assume that 70.000 drums are needed each year. a. What will be the total relevant cost of 70.000 drums if they are manufactured internally as compared to being purchased? Total relevant cost (70,000 drums) b. What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.) Per unit cost of drum c. Which course of action would you recommend to the managing director? Purchase from the outside supplier Manufacture internally Indifferent between the two alternatives 28-1. What will be the total relevant cost of 140.000 drums if they are manufactured internally! Total relevant cost (140.000 drums) 2a-2 What would be the per unit cost of drums? Per unit cost of drum 2 a-3. What course of action would you recommend if 140.000 drums are needed each year? Indifferent between the two alternatives Manufacture internally Purchase from the outside supplier 26-1. What will be the total relevant cost of 175.000 drums if they are manufactured internally? Total relevant cost (175,000 drums) 20-2. What would be the per unit cost of drums? (Round your answer to 2 decimal places.) Per unit cost of drum 26-3. What course of action would you recommend if 175.000 drums are needed each year? Manufacture internally Purchase from the outside supplier Indifferent between the two alternatives
