âIn my opinion, we ought to stop making our own drums and acceptthat outside supplierâs offer,â said Wim Niewindt, managingdirector of Antilles Refining, N.V., of Aruba. âAt a price of $18per drum, we would be paying $6.65 less than it costs us tomanufacture the drums in our own plant. Since we use 65,000 drums ayear, that would be an annual cost savings of $432,250.â AntillesRefiningâs current cost to manufacture one drum is given below(based on 65,000 drums per year):
Direct materials $ 10.50 Direct labor 7.50 Variable overhead 1.50 Fixed overhead ($2.60 generalcompany overhead, $1.65 depreciation, and,$0.90 supervision) 5.15 Total cost per drum $ 24.65
A decision about whether to make or buy the drums is especiallyimportant at this time because the equipment being used to make thedrums is completely worn out and must be replaced. The choicesfacing the company are:
Alternative 1: Rent new equipment and continue to makethe drums. The equipment would be rented for $175,500 per year.
Alternative 2: Purchase the drums from an outsidesupplier at $18 per drum.
The new equipment would be more efficient than the equipmentthat Antilles Refining has been using and, according to themanufacturer, would reduce direct labor and variable overhead costsby 30%. The old equipment has no resale value. Supervision cost($58,500 per year) and direct materials cost per drum would not beaffected by the new equipment. The new equipmentâs capacity wouldbe 225,000 drums per year.
The companyâs total general company overhead would be unaffectedby this decision. (Round all intermediate calculations to 2decimal places.)
Required:
1. To assist the managing director in making a decision, preparean analysis showing the total cost and the cost per drum for eachof the two alternatives given above. Assume that 65,000 drums areneeded each year.
a. What will be the total relevant cost of 65,000 drums if theyare manufactured internally as compared to being purchased?
b. What would be the per unit cost of each drum manufacturedinternally? (Round your answer to 2 decimalplaces.)
c. Which course of action would you recommend to the managingdirector?
Purchase from the outsidesupplier Manufacture internally Indifferent between the twoalternatives
2a-1. What will be the total relevant cost of 195,000 drums ifthey are manufactured internally?
2a-2. What would be the per unit cost of drums?
2 a-3. What course of action would you recommend if 195,000drums are needed each year?
Indifferent between the twoalternatives Manufacture internally Purchase from the outsidesupplier
2b-1. What will be the total relevant cost of 225,000 drums ifthey are manufactured internally?
2b-2. What would be the per unit cost of drums? (Roundyour answer to 2 decimal places.)
2b-3. What course of action would you recommend if 225,000 drumsare needed each year?
Manufacture internally Purchase from the outsidesupplier Indifferent between the twoalternatives
âIn my opinion, we ought to stop making our own drums and acceptthat outside supplierâs offer,â said Wim Niewindt, managingdirector of Antilles Refining, N.V., of Aruba. âAt a price of $18per drum, we would be paying $6.65 less than it costs us tomanufacture the drums in our own plant. Since we use 65,000 drums ayear, that would be an annual cost savings of $432,250.â AntillesRefiningâs current cost to manufacture one drum is given below(based on 65,000 drums per year):
| Direct materials | $ | 10.50 |
| Direct labor | 7.50 | |
| Variable overhead | 1.50 | |
| Fixed overhead ($2.60 generalcompany overhead, $1.65 depreciation, and,$0.90 supervision) | 5.15 | |
| Total cost per drum | $ | 24.65 |
A decision about whether to make or buy the drums is especiallyimportant at this time because the equipment being used to make thedrums is completely worn out and must be replaced. The choicesfacing the company are:
Alternative 1: Rent new equipment and continue to makethe drums. The equipment would be rented for $175,500 per year.
Alternative 2: Purchase the drums from an outsidesupplier at $18 per drum.
The new equipment would be more efficient than the equipmentthat Antilles Refining has been using and, according to themanufacturer, would reduce direct labor and variable overhead costsby 30%. The old equipment has no resale value. Supervision cost($58,500 per year) and direct materials cost per drum would not beaffected by the new equipment. The new equipmentâs capacity wouldbe 225,000 drums per year.
The companyâs total general company overhead would be unaffectedby this decision. (Round all intermediate calculations to 2decimal places.)
Required:
1. To assist the managing director in making a decision, preparean analysis showing the total cost and the cost per drum for eachof the two alternatives given above. Assume that 65,000 drums areneeded each year.
a. What will be the total relevant cost of 65,000 drums if theyare manufactured internally as compared to being purchased?
b. What would be the per unit cost of each drum manufacturedinternally? (Round your answer to 2 decimalplaces.)
c. Which course of action would you recommend to the managingdirector?
| Purchase from the outsidesupplier | |
| Manufacture internally | |
| Indifferent between the twoalternatives |
2a-1. What will be the total relevant cost of 195,000 drums ifthey are manufactured internally?
2a-2. What would be the per unit cost of drums?
2 a-3. What course of action would you recommend if 195,000drums are needed each year?
| Indifferent between the twoalternatives | |
| Manufacture internally | |
| Purchase from the outsidesupplier |
2b-1. What will be the total relevant cost of 225,000 drums ifthey are manufactured internally?
2b-2. What would be the per unit cost of drums? (Roundyour answer to 2 decimal places.)
2b-3. What course of action would you recommend if 225,000 drumsare needed each year?
| Manufacture internally | |
| Purchase from the outsidesupplier | |
| Indifferent between the twoalternatives |
Related questions
In my opinion, we ought to stop making our own drums and accept that outside supplierâs offer,â said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. âAt a price of $17 per drum, we would be paying $6.85 less than it costs us to manufacture the drums in our own plant. Since we use 50,000 drums a year, that would be an annual cost savings of $342,500.â Antilles Refiningâs current cost to manufacture one drum is given below (based on 50,000 drums per year):
| Direct materials | $ | 10.40 |
| Direct labor | 6.50 | |
| Variable overhead | 1.50 | |
| Fixed overhead ($2.90 general company overhead, $1.65 depreciation, and, $0.90 supervision) | 5.45 | |
| Total cost per drum | $ | 23.85 |
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 $17 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 40%. 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 equipmentâs capacity would be 125,000 drums per year.
The companyâs total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.)
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 50,000 drums are needed each year.
a. What will be the total relevant cost of 50,000 drums if they are manufactured internally as compared to being purchased?
b. What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.)
c. Which course of action would you recommend to the managing director?
| Purchase from the outside supplier | |
| Manufacture internally | |
| Indifferent between the two alternatives |
2a-1. What will be the total relevant cost of 100,000 drums if they are manufactured internally?
2a-2. What would be the per unit cost of drums?
2 a-3. What course of action would you recommend if 100,000 drums are needed each year?
| Indifferent between the two alternatives | |
| Manufacture internally | |
| Purchase from the outside supplier |
2b-1. What will be the total relevant cost of 125,000 drums if they are manufactured internally?
2b-2. What would be the per unit cost of drums? (Round your answer to 2 decimal places.)
2b-3. What course of action would you recommend if 125,000 drums are needed each year?
| Manufacture internally | |
| Purchase from the outside supplier | |
| Indifferent between the two alternatives |
