PROBLEM 728 Make or Buy Analysis [LO 73]In my opinion, we ought to stop making our own drums and accept that outside suppliers offer, said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. At a price of $18 per drum, we would be paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $300,000. Antilles Refinings current cost to manufacture one drum is given below (based on 60,000 drums per year): 324Chapter 7nor78542_ch07_280-332.indd 324 11/19/15 11:02 AM 2. Assuming that the store space cant be subleased, what recommendation would you make to the management of Superior Markets, Inc.? 3. Disregard requirement 2. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation concerning the North Store? Show all computations to support your answer.PROBLEM 727 Sell or Process Further [LO 77]Come-Clean Corporation produces a variety of cleaning compounds and solutions for both indus-trial and household use. While most of its products are processed independently, a few are related, such as the companys Grit 337 and its Sparkle silver polish.Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound to make, and it has a selling price of $2.00 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $4.00 per jar.This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct costs involved in the processing of a jar of silver polish are:Other ingredients.........................$0.65Direct labor .............................. 1.48Total direct cost...........................$2.13Variable manufacturing overhead cost...................25% of direct labor costFixed manufacturing overhead cost (per month):Production supervisor .................................$3,000Depreciation of mixing equipment ......................$1,400Overhead costs associated with processing the silver polish are:The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. Its resale value is negligible and it does not wear out through use.Direct labor is a variable cost at Come-Clean Corporation.Advertising costs for the silver polish total $4,000 per month. Variable selling costs associated with the silver polish are 7.5% of sales.Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.Required: 1. What is the incremental contribution margin per jar from further processing of Grit 337 into silver polish? 2. What is the minimum number of jars of silver polish that must be sold each month to justify the continued processing of Grit 337 into silver polish? Explain. Show all computations.(CMA, adapted)PROBLEM 728 Make or Buy Analysis [LO 73]In my opinion, we ought to stop making our own drums and accept that outside suppliers offer, said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. At a price of $18 per drum, we would be paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $300,000. Antilles Refinings current cost to manufacture one drum is given below (based on 60,000 drums per year):Final PDF to printer 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 $135,000 per year. Alternative 2: Purchase the drums from an outside supplier at $18 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 30%. The old equipment has no resale value. Supervision cost ($45,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipments capacity would be 90,000 drums per year.The companys total general company overhead would be unaffected by this decision.Required: 1. To assist the managing director in making a decision, prepare an analysis showing the total cost and the cost per drum for each of the two alternatives given above. Assume that 60,000 drums are needed each year. Which course of action would you recommend to the managing director? 2. Would your recommendation in requirement 1 be the same if the companys needs were: (a) 75,000 drums per year or (b) 90,000 drums per year? Show computations to support your answer, with costs presented on both a total and a per unit basis. 3. What other factors would you recommend that the company consider before making a decision?Direct materials............................................$10.35Direct labor ...............................................6.00Variable overhead .........................................1.50Fixed overhead ($2.80 general company overhead, $1.60 depreciation and, $0.75 supervision) ....... 5.15Total cost per drum ........................................$23.00