“In my opinion, we ought to stop making our own drums and accept that outside su
ID: 2452572 • 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 $21 per drum, we would be paying $6.00 less than it costs us to manufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $420,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 70,000 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 20%. The old equipment has no resale value. Supervision cost ($77,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity would be 175,000 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 70,000 drums are needed each year.
What will be the total relevant cost of 70,000 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 140,000 drums if they are manufactured internally?
What would be the per unit cost of drums?
What will be the total relevant cost of 175,000 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 $21 per drum, we would be paying $6.00 less than it costs us to manufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $420,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 70,000 drums per year):
Explanation / Answer
Avtivity Level Units Drums(Level Of Activity ) Per Unit 70000 140000 175000 Direct materials 11 770000 1540000 1925000 Direct labor =8.5*0.8 6.8 476000 952000 1190000 Variable overhead =1.25*0.80 1 70000 140000 175000 Total Variable Cost 1316000 2632000 3290000 Fixed overhead Equipmnet Rent 231000 Supervision cost 77000 308000 308000 308000 Total Manufacturing Cost 1624000 2940000 3598000 Manufacturing Cost Per Unit 23.2 21 20.56 Outside Purchase Cost 21 21 21 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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