Make vs buy

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"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managing director ot Antilles Refining, N.V., ot Aruba "At a price ot $19 per drum, we would be paying $5.80 less than it costs us to manufacture the drums in our own plant Since we use 70,000 drums a year, that would be an annual cost savings ot Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead (S3.80 general company overhead, depreciation, and SO 90 supervision) Total cost per drum Sl.50 $10.60 6.00 2.00 6.20 $24.80 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 S189,OOO per year. Alternative 2: Purchase the drums trom an outside supplier at S19 per drum. The new equipment would be more etticient than the equipment that Antilles Refining nas 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 ($63,000 per year) and direct materials cost per drum would not be affected by the new equipment The new equipment's capacity would be 100,000 drums per year. The company's total general company overhead would be unaffected by this decisiom Required: 1. Assuming that 70,000 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 100,000 drums are needed each year, what is the financial advantage (disadvantage) ot buying the drums trom an outside supplier? (For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations.) Financial Advanta Production (Disadvantage) of Needs 2. 70,000 90,000 100,000 Buying the Drums drums drums drums