"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.

Hondrich Company's costs per unit of producing the oil drums internally $($with the old equipment$)$ are given below. These costs are

based on a current activity level of $40,000$ units per year:

Direct materials

Direct labour

Variable overhead

Fixed overhead $($ $$1\mathrm{.}50$ supervision, $$1\mathrm{.}80$ depreciation,

and $$4$ general company overhead$)$

Total cost per unit

The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead

costs by $25\%.$ Supervision cost $($ $$60,000$ per year$)$ and direct materials cost per unit would not be affected by the new equipment. The

new equipment's capacity would be $60,000$ oil drums per year.

The total general company overhead would be unaffected by this decision.

Required:

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?

Would your recommendation in $(1)$ above be the same if the company's needs were $($a$)50,000$ oil drums per year, or $($b$)60,000$ oil

drums per year? Show computations in good form.

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