'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 NV of Aruba. 'At a price of 18 florins per drum, we would be paying 5 florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted below by fl.) Since we use 60,000 drums a year, that would be an annual cost saving of 300,000 florins.' Antilles Refining's present cost to manufacture one drum is given below (based on 60,000 drums per year).

Direct material		fl10.35
Direct labour		6.00
Variable overhead		1.50
Fixed overhead (fl2.80 general company overhead,fl1.60 depreciation and, fl0.75 supervision)		5.15
Total cost per drum		23.00

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 fl810,000; it would have a six-year useful life and no salvage value. The company uses straight-line depreciation.
Alternative 2	Purchase the drums from an outside supplier at fl18 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 manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost (fl45,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 90,000 drums per year. The company has no other use for the space being used to produce the drums.

The company's total general company overhead would be unaffected by this decision.

Required:
1.	To assist the managing director in making a decision, prepare an analysis showing what the total cost and the cost per drum would be under each of the alternatives given above. Assume that 60,000 drums are needed each year. (Enter all answers as positive amounts. Do not round intermediate calculations. Round your per unit answers to two decimal places. Leave no cells blank. You must enter a '0' for the answer to grade correctly.)

		Differential Costs		Total Differential Costs
		Per Drum		60,000 Drums
		Make	Buy	Make	Buy
	Outside supplier's price		fl		fl
	Direct materials	fl		fl
	Direct labour	fl		fl
	Variable overhead	fl		fl
	Supervision	fl		fl
	Depreciation	fl		fl
	Total cost	fl	fl	fl	fl
	Difference between making and buying	fl		fl

	Which course of action would you recommend to the managing director?

2.	(a)	Which course of action would you recommend to the managing director if the company's needs were 75,000 drums per year?

		Show computations to support your answer, with costs presented on both a total and a per unit basis. (Do not round intermediate calculations. Round your per unit answers to two decimal places. Leave no cells blank. You must enter a '0' for the answer to grade correctly.)

Differential Costs

Total Differential Costs

Per Drum

75,000 Drums

Make

Buy

Make

Buy

Outside supplier's price

fl

fl

Direct materials

fl

fl

Direct labour

fl

fl

Variable overhead

fl

fl

Supervision

fl

fl

Depreciation

fl

fl

Total cost

fl

fl

fl

fl

Difference between making and buying

fl

fl

Which course of action would you recommend to the managing director if the company's needs were 90,000 drums per year?

Show computations to support your answer, with costs presented on both a total and a per unit basis. (Do not round intermediate calculations. Round your per unit answers to two decimal places. Leave no cells blank. You must enter a '0' for the answer to grade correctly.)

Differential Costs

Total Differential Costs

Per Drum

90,000 Drums

Make

Buy

Make

Buy

Outside supplier's price

fl

fl

Direct materials

fl

fl

Direct labour

fl

fl

Variable overhead

fl

fl

Supervision

fl

fl

Depreciation

fl

fl

Total cost

fl

fl

fl

fl

Difference between making and buying

fl

fl

3.

In addition, which of the following factors should the company consider before making this decision? (Check all that apply.)

Can quality control be maintained if the drums are purchased from the outside supplier?

Will costs for materials and labour increase in future years?

Will there be an increase of insurance charge for the companys headquarters building?

Will the outside supplier be dependable in meeting shipping schedules?