P423 Make or bug analgsis Time allowed: 45 minutes 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 I8 florins per drum, we would be paging & florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted below by fL.) Since we use 60,000 drums a gear, that would be an annual cost saving of 30000o Refining's present cost to manufacture one drum is given below (based on 60,000 drums per geark Direct labour vanable overhead Fned overhead f10.35 6.00 1.50 80 general company overhead., 11.60 depreciation and, fio.75 supervision) Total cost per drum 5.15 123.00 about whether to make or buy the drums is especially important at this time since the equipment being A decisio and to make the drums is completely worm out and must be replaced. The choices facing the company are 1 Prchase new equipment and continue to make the drums. The equipment would cost 1810.000; it would have a sixyear useful life and no salvage value. The company uses Aternative 2 Purchase the drums from an outside supplier at f18 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 (145,000 per year) and direct materials cost per not be affected by the new equipment. The new equipment's capacity would be 90,000 drums per gear compang drum would has no other use for the space being used to produce the drums The company's total general company overhead would be Required 1 To assist the managing unaffected by this decision director in making a decision, prepare an analysis showing what the total cost and drum would be under each of the alternatives given above. Assume that 60,000 drums are the cost per needed each year. Which course of action would you recommend to the managing director? 2 Would gour recommendation in Requirement I above be the samme if the needs were (a) 75,000 drums per gear or (b) 90,000 drums per year? Show computations to presented on both a total and a per unit basis What other factors your answer, with costs 3 would you recommend that the compang consider before making a decision