"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 Co. "At a price of P18 per drum, we would be paying P5 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 saving of P300,000." Antilles Refining's present cost

to manufacture one drum is given below (based on 60,000 drums per year):

Direct material P10.35

Direct labor 6.00

Variable overhead 1.50

Fixed overhead (P2.80 general company overhead,

P1.60 depreciation and, P0.75 supervision) 5.15

Total cost per drum P23.00

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:

Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost P810,000; it would have a six-

year useful life and P100,000 salvage value. The company uses straight-line depreciation.

Alternative 2: Purchase the drums from an outside supplier at P20 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

manufacturing, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value.

PROBLEM 2 "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 Co. "At a price of P18 per drum, we would be paying P5 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 saving of P300,000." Antilles Refining's present cost to manufacture one drum is given below (based on 60,000 drums per year): Direct material P10.35 Direct labor 6.00 Variable overhead 1.50 Fixed overhead (P2.80 general company overhead, P1.60 depreciation and, PO.75 supervision) 5.15 Total cost per drum P23.00 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: Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost P810,000; it would have a six- year useful life and P100,000 salvage value. The company uses straight-line depreciation. Alternative 2: Purchase the drums from an outside supplier at P20 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 manufacturing, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value