“In my opinion, we ought to stop making our own drums and accept that outside su
ID: 2449848 • Letter: #
Question
“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 $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.” Antilles Refining’s current cost to manufacture one drum is given below (based on 50,000 drums per year):
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:
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 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.)
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.
What will be the total relevant cost of 50,000 drums if they are manufactured internally as compared to being purchased?
What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.)
What will be the total relevant cost of 100,000 drums if they are manufactured internally?
What would be the per unit cost of drums?
What will be the total relevant cost of 125,000 drums if they are manufactured internally?
What would be the per unit cost of drums? (Round your answer to 2 decimal places.)
“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 $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.” Antilles Refining’s current cost to manufacture one drum is given below (based on 50,000 drums per year):
Explanation / Answer
Avtivity Level Units Drums(Level Of Activity ) Per Unit 50000 100000 1250000 Direct materials 10.4 520000 1040000 13000000 Direct labor =6.5*0.6 3.9 195000 390000 4875000 Variable overhead =1.5*0.6 0.9 45000 90000 1125000 Total Variable Cost 760000 1520000 19000000 Fixed overhead Equipmnet Rent 135000 Supervision cost 45000 180000 180000 180000 Total Manufacturing Cost 940000 1700000 19180000 Manufacturing Cost Per Unit 18.8 17 15.34 Outside Purchase Cost 17 17 17 course of action would you recommend to the managing director Purchase from the outside supplier Indifferent between the two alternatives Manufacture internally
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