Problem 12-28 Make or Buy Decisions [L012-3) "In my opinion, we ought to stop making our own drums and accept that outside supplier's offer, said WIm Nlewindt, managing director of Antiles Refining, N.V., of Aruba. At a price of $22 per drum, we would be paying $3.50 less than it costs us to manufacture the drums in our own plant. Since we use 95,000 drums a year, that would be an annual cost savings of $332,500. Antilles Refining's current cost to manufacture one drum is glven below (based on 95,000 drums per yearj: Direct materials Direct labor Variable overhead Fixed overhead 2.70 general $10.60 8.00 1.50 company overhead, $1-70 depreciation and, $1.00 supervision) 5.40 Total cost per drum $25.s0 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 Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $285,000 per year. Alternative 2: Purchase the drums from an outside supplier at $22 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 20%. The old equipment has no resale value. Supervision cost ($95,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 125,000 drums per year The company's total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places) Required: L Assuming that 95,000 drums are needed each year, what is the tinancial advantage (dsadvantage) of buying the drums from an outside supp er? 2. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supp er? Assuming that 125,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supp er? (For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate Production (disadvanta Needs of buying the 1. 95,000 dr 100 3. 125