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 60 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 Afl.) Since we use 100,000 drums a year, we would save 1,000,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 100,000 drums per year): 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 follows: - Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost Afl1,350,000; 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 Afl60 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 (Aff550,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 550,000 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-a. Calculate the total costs and costs per drum under the two alternatives. Assume that 100,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) 1-b. Should the company make or buy based on analysis in part (1-a)? Make Buy ChatGPT To compare the total costs and costs per drum for the two alternatives (make or buy), let's calculate the costs under each option: Alternative 1: Make the drums (Purchase new equipment) 1-a. Total Costs: Equipment Cost: Afl1,350,000 Annual Depreciation = Equipment Cost / Useful life = Afl1,350,000 / 6 = Afl225,000 Direct Labor and Variable Overhead Cost per Drum = Afl10 (given) General Company Overhead Cost per Year = Afl550,000 (given) Number of Drums Needed = 100,000 Total Costs = Annual Depreciation + (Direct Labor + Variable Overhead Cost) * Number of Drums + General Company Overhead Cost Total Costs = Afl225,000 + (Afl10 * 100,000) + Afl550,000 Total Costs = Afl2,225,000 Cost per Drum = Total Costs / Number of Drums Cost per Drum = Afl2,225,000 / 100,000 Cost per Drum = Afl22.25 Alternative 2: Buy the drums from an outside supplier 1-a. Total Costs: Cost per Drum from Supplier = Afl60 (given) Number of Drums Needed = 100,000 Total Costs = Cost per Drum from Supplier * Number of Drums Total Costs = Afl60 * 100,000 Total Costs = Afl6,000,000 Cost per Drum = Total Costs / Number of Drums Cost per Drum = Afl6,000,000 / 100,000 Cost per Drum = Afl60.00 1-b. Based on the analysis in part (1-a), the company should "Buy" the drums from an outside supplier because it would cost Afl60.00 per drum, which is Afl2.25 less per drum than the Afl22.25 it costs to manufacture the drums in their own plant. By buying the drums, the company would save 1,000,000 florins on an annual basis, as stated in the initial statement. Additionally, the new equipment's increased efficiency and reduced labor and overhead costs justify the decision to purchase from the outside supplier. Regenerate response