C ezto.mheducation.com/hm.tpx?-0.9844471699635021 1461808964575 Apps HIP Connect
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C ezto.mheducation.com/hm.tpx?-0.9844471699635021 1461808964575 Apps HIP Connected M McGraw-Hill Connect M http//c 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 $18 per drum, we would be paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year that would be an annual cost savings of $300,000. Antilles Refining's current cost to manufacture one drum is given below (bas ed on 60,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead ($2.80 general company overhead, $1.60 $10.35 6.00 1.50 depreciation, and, S0.75 supervision) 5.15 Total cost per drum S 23.00 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 wom 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 S135,000 per year Purchase the drums from an outside supplier at $18 per drum Alternative 2 The new equipment would be more efficient than the equipment that Antles Refining has been using and according to the manufacturer, would reduce direct labor and varable overhead costs by 30% The old equipment has no resale value Supervision cost ($45 000 per yean and direct materia's cost per drum would not be affected by the new equipment. The new equpment's capacity would be 90 000 drums per year The company's total general compeny overmeed would be unaffected by this decision (Round all intermediate calculations to 2 decimal places.)Explanation / Answer
At 60000 units Alternative 1 Alternative 2 Direct material 10.35 0 Direct labor 4.2 0 Variable overhead 1.05 0 Fixed overhead general overhead 2.8 2.8 rental ( 135000/60000) 2.25 0 supervision ( 45000/60000) 0.75 0 Purchase cost 18 Total 21.4 20.8 1a) Total Relevant cost for alternative 1 1284000 ( 60000 * 20.65) 1b) Total relevant cost per unit 21.4 1c) Purchase from outside supplier as the relevant cost per unit at 60000 units is lower than purchasing it 2a-1) At 75000 units Alternative 1 Alternative 2 Direct material 10.35 0 Direct labor 4.2 0 Variable overhead 1.05 0 Fixed overhead general overhead 2.8 2.8 rental ( 135000/75000) 1.8 0 supervision ( 45000/75000) 0.6 0 Purchase cost 18 Total 20.8 20.8 Number of units 75000 Total relevant cost 1560000 2a-2) per unit cost of drums 20.8 2a-3) Indifferent between the two alternatives as the cost per unit is the same at 75000 units 2b-1) At 90000 units Alternative 1 Alternative 2 Direct material 10.35 0 Direct labor 4.2 0 Variable overhead 1.05 0 Fixed overhead general overhead 2.8 2.8 rental ( 135000/90000) 1.5 0 supervision ( 45000/90000) 0.5 0 Purchase cost 18 Total 20.4 20.8 Number of units 90000 Total relevant cost 1836000 Total relevant cost for 90000 drums 1836000 2b-2) per unit cost of drums 20.4 2b-3) Manufacture internally as the cost per unit is lower than buying it from outside supplier
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