Transcribed Image Text: “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director

Transcribed Image Text: “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing
director of Antilles Refining, N.V., of Aruba. “At a price of $19 per drum, we would be paying $5.45 less than it costs us to manufacture
the drums in our own plant. Since we use 85,000 drums a year, that would be an annual cost savings of $463,250.” Antilles Refining’s
current cost to manufacture one drum is given below (based on 85,000 drums per year):
Direct materials
$10.70
Direct labor
5.50
Variable overhead
1.50
Fixed overhead ($3.70 general
company overhead, $2.05 depreciation,
and, $1.00 supervision)
6.75
Total cost per drum
$24.45
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 $255,000 per year.
Alternative 2: Purchase the drums from an outside supplier at $19 per drum. Transcribed Image Text: 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 30%. The old equipment has no resale value. Supervision cost
($85,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity
would be 125,000 drums per year.
The company’s total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2
decimal places.)
Required:
1. Assuming that 85,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an
outside supplier?
2. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an
outside supplier?
3. Assuming that 125,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an
outside supplier?

Need your ASSIGNMENT done? Use our paper writing service to score better and meet your deadline.


Click Here to Make an Order Click Here to Hire a Writer