\"In my opinion, we ought to stop making our own drums and accept that outside s
ID: 2509832 • 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 $20 per drum we would be paying $4.25 less than it costs us to manufacture the drums in our own plant. Since we use 75,000 drums a year, that would be an annual cost savings of $318,750. Antilles Refining's current cost to manufacture one drum is given below (based on 75,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead ($2.80 general company overhead, $1.75 S 11.10 6.00 1.60 5.55 S 24.25 depreciation, and, $1.00 supervision) Total cost per drum 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 $225,000 per year Alternative 2: Purchase the drums from an outside supplier at $20 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 25%. The old equipment has no resale value Supervision cost ($75,000 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. 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 altematives given above. Assume that 75,000 drums are needed each yearExplanation / Answer
Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 75000 Make Buy Make Buy Outside supplier's Price 20 1500000 Direct Material 11.1 832500 Direct Labor 4.5 337500 Variable Overhead 1.2 90000 Supervision 1 75000 Depreciation 3 225000 Total costs 20.8 20 1560000 1500000 Requirement 1-a Total relevent cost of manufacturing the 75000 drums are 1560000 Requirement 1-b Per unit cost of each drum manufactured internally 20.8 Requirement 1-c The company should purchase from outside supplier Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 93750 Make Buy Make Buy Outside supplier's Price 20 1875000 Direct Material 11.1 1040625 Direct Labor 4.5 421875 Variable Overhead 1.2 112500 Supervision 0.8 75000 Depreciation 2.4 225000 Total costs 20 20 1875000 1875000 Requirement 2-a1 Total relevent cost of manufacturing the 93750 drums are 1875000 Requirement 2-a2 Per unit cost of each drum manufactured internally 20 Requirement 2-a3 Indifferent between two alternatives. Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 125000 Make Buy Make Buy Outside supplier's Price 20 2500000 Direct Material 11.1 1387500 Direct Labor 4.5 562500 Variable Overhead 1.2 150000 Supervision 0.6 75000 Depreciation 1.80 225000 Total costs 19.20 20 2400000 2500000 Requirement 2-b1 Total relevent cost of manufacturing the 125000 drums are 2400000 Requirement 2-b2 Per unit cost of each drum manufactured internally 19.2 Requirement 2-b3 The company should manufacture internally
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.