That old equipment for producing oil drums is worn out, said Bill Seebach, president of Hondrich Company. We need to make a decision quickly. The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow:

alternative 1: Rent new equipment for producing the oil drums for $120,000 per year.

Alternative 2: Purchase oil drums from an outside supplier for $16 each.

direct materials	5.50
direct labour	8.00
variable overhead	1.20
fixed overhead (1.50 supervision, 1.80 depreciation and $4 general company overhead	7.30
total cost per unit	$22.00

required:

1. Seebach is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the two alternatives given above. Assume that 40,000 oil drums are needed each year. Which course of action would you recommend to Seebach?

2. Would your recommendation in (1) above be the same if the companys needs were (a) 50,000 oil drums per year, or (b) 60,000 oil drums per year? Show computations in good form.

3. What other factors would you recommend that Seebach consider before making a decision?