"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 72 florins per drum, we would be paying 10 florins less than it costs us to

manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Af.) Since we use 140,000 drums a year, we

would save 1.400,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 140,000

drums dervean

8 010801

Dareci

materla

labour

Variable overhead

Fixed overhead (At111.60 general company overhead, AT19

depreciation and, AtI7.50 supervision

Total cost per

18.00

9.00

28.30

Af182.00

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 as TOllOws

Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost A111,890,000; it would havE

six-year useful life and no salvage value. The company uses straight-line depreciatior

Alternative 2: Purchase the drums from an outside supplier at Af/2 per drum under a six-year contract.

The new equipment woudlhe more

pficien

moan

the

equipment that Antilles Refining has been using and, according to the

manutacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has

no resale value. Supervision

CostA11050,000 per vear and direct materials cost per drum would not be affectedlavthe new paunment The new paninments

capacity would be 1,050,000 drums per year. The company has no other use for the space being used to produce the drums

'The companv siola denera, company overhead would De una-c (nis decision

Required

1-0. Calculate the tota costs

drum under the two alternatives. Assume that 140000 drums are needed each year

Round Cost Per drum answersto2 decimaldlacas

BU

Total (ferential Costs- -140,000 Drums

Buy

Outside:

=Direct labour

Super

Deprecision

S price