"That old equipment for producing oll drums is worn out," sald 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 oll drums Internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternatlve 1: Rent new equipment for producing the oll drums for $100,000 per year. Alternative 2: Purchase oll drums from an outside supplier for $17.40 each. Hondrich Company's costs per unit of producing the oll drums internally (wlth the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year: The new equipment would be more efficlent and, according to the manufacturer, would reduce direct labour costs and varlable overhead costs by 25%. Supervision cost ($50,000 per year) and direct materlals cost per unlt would not be affected by the new equipment. The new equipment's capacity would be 62,500 oll drums per year. The total general company overhead would be unaffected by this decision. Requirect: 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 tw alternatives given above. Assume that 40,000 oll drums are needed each year. a. What will be the total relevant cost of 40,000 subassemblies if they are manufactured Internally as compared to being purchased? b. What would be the per unit cost of the each subassembly manufactured Internally? (Do not round Intermedlate calculations. Round your answer to 2 decimal places.) 2. 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 alternatlives given above. a-1. What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally? a-2. What would be the per unit cost of subassembly manufactured Internally? (Do not round Intermedlate calculations. Round your answer to 2 decimal places.) a-3. Which course of action would you recommend if 50,000 assembles are needed each year? Purchase from the outside supplier Manufacture internally Indifferent between the two alternatlves b-1. What will be the total relevant cost of 62,500 subassemblies if they are manufactured internally? b.2. What would be the per unit cost of subassembly manufactured Internally? (Do not round Intermedlate calculatlons. Round your answer to 2 decimal places.) b-2. What would be the per unit cost of subassembly manufactured Internally? (Do not round Intermedlate calculatlons. Round your answer to 2 decimal places.) b.3. Which course of action would you recommend if 62,500 assemblies are needed each year? Purchase from the outside supplier Indlfferent between the two alternatives Manufacture internally
