Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In my opinion, we ought to stop making our own drums and accept that outside suppliers offer, said Wim Niewindt, managing director of Antilles Refining,

In my opinion, we ought to stop making our own drums and accept that outside suppliers offer, said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. At a price of $21 per drum, we would be paying $7.05 less than it costs us to manufacture the drums in our own plant. Since we use 65,000 drums a year, that would be an annual cost savings of $458,250. Antilles Refinings current cost to manufacture one drum is given below (based on 65,000 drums per year):

Direct materials $ 10.70
Direct labor 9.50
Variable overhead 1.50
Fixed overhead ($3.50 general company overhead, $1.95 depreciation, and $0.90 supervision) 6.35
Total cost per drum $ 28.05

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 $175,500 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 30%. The old equipment has no resale value. Supervision cost ($58,500 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipments capacity would be 130,000 drums per year.

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

Required:

1. Assuming that 65,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 90,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 130,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

image text in transcribed

Production Needs Financial advantage (disadvantage) of buying the drums 1. 65,000 drums 2. 90,000 drums 3. 130,000 drums

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Nonprofit Human Service Organizations

Authors: Raymond Sanchez Mayers

2nd Edition

0398075131, 9780398075132

More Books

Students also viewed these Finance questions

Question

Discuss global cultural differences in GLOBE dimensions.

Answered: 1 week ago

Question

LO1 Discuss the objectives of human resource management.

Answered: 1 week ago