"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 $20 per drum, we would be paying $4 25 less than it costs us to manufacture the drums in our own plant. Since we use 75,000 drums a year, that would be an annual cost savings of $318,750" Antilles Refining's current cost to manufacture one drum is given below (based on 75,000 drums per year) $11.19 6.00 1.60 Direct materials Direct labor Variable overhead Fixed overhead ($2.80 general company overhead, $1.75 depreciation, and $1.00 supervision) Total cost per drun 5.55 $24.25 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 $225,000 per year. Alternative 2. Purchase the drums from an outside supplier at $20 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 25% The old equipment has no resale value Supervision cost ($75.000 ner wear and direct material roet ner rum would not heatertart hy the new erinment The new coments canarit Production Needs Financial advantage (disadvantage) of buying the drums 1. 75,000 drums 2. 93,750 drums 125,000 drums 3