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That old equipment for producing oll drums is worn out, said Bili Seebach, president of Hondrich Company. We need to make a decision quickly. The

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"That old equipment for producing oll drums is worn out," said Bili 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 oli drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: A/ternative t Rent new equipment for producing the oll drums for $208,000 per year. Atremative 2- Purchase oll drums from an outside supplier for $18.90 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: 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 (\$104,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment's capacity would be 65,000 oil drums per year. The total general company overhead would be unaffected by this decision. 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 twe alternotives given obove. Assume that 40,000 oil drums are needed each year. 1. Seeboch is unsure what the compary should do and would tike an anolysis showing the unit costs and total costs for each of the two altemstives 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 eoch subessembly manufactured intemally? (Do not round intermediate calculetions. Round your antwer to 2 decimal places.] c. Which course of action would you recommend to the president? Manuifocture internally Purchase from the outside supplier Indifferent between the two alternatives

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