director of Antilles Refining. N.V, of Aruba. \"At a price of $18 per drum, we w

Question

director of Antilles Refining. N.V, of Aruba. "At a price of $18 per drum, we would be paying $6.65 less than It costs us to manufacture the drums in our own plant Since we use 65.000 drums a year, that would be an annual cost savings of $432 250 Antles Refining's current cost to manufacture one drum is glven below (based on 65,000 drums per year Direct materials Direct labor Variable overhead Fixed overhead ($2.60 general $10.se 7.5e 1.5e company overhead, $1.65 depreciation, and, $e.9e supervision) 5.15 $24.65 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 $175.500 per year Alternative 2: Purchase the drums from an outside suppilier at $18 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 30%. The old equipment has no resale value. Supervision cost ($58,500 per year) and direct materiais cost per drum would not be affected by the new equipment The new equipment's capacity would be 225,000 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 65.000 drums are needed each year what is the financial advantage (oisadvantage) of buyýing the drums from an 2. Assuming thot 195,000 drums are needed each yeor what is the inancal advantage (disadvantage) of buying the drums from atn outside suppler? outside suppler? 3. Assuming that 225.000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? (For all requlrements, enter any "disadvantages" as a negatlve value. Do not round intermedlate celcuiations.) Production (disadvantage of buying the drum Needs 165,000 drums 2 195,000 drums 3. 225,000 drums

Explanation / Answer

1 Differential cost: Make Buy Purchase cost 18 Direct material 10.5 Direct labor (7.5*0.7) 5.25 Variable overhead (1.5*0.7) 1.05 Supervision 0.9 Equipment rental (175500/65000) 2.7 Total cost 20.4 18 Financial advantage of buying from an outside supplier for 65000 drums=65000*(20.4-18)=156000 2 Differential cost: Make Buy Purchase cost 18 Direct material 10.5 Direct labor (7.5*0.7) 5.25 Variable overhead (1.5*0.7) 1.05 Supervision 0.9 Equipment rental (175500/195000) 0.9 Total cost 18.6 18 Financial advantage of buying from an outside supplier for 195000 drums=195000*(18.6-18)=117000 3 Differential cost: Make Buy Purchase cost 18 Direct material 10.5 Direct labor (7.5*0.7) 5.25 Variable overhead (1.5*0.7) 1.05 Supervision 0.9 Equipment rental (175500/225000) 0.78 Total cost 18.48 18 Financial advantage of buying from an outside supplier for 225000 drums=225000*(18.48-18)=108000 Note:General company overhead and depreciation are irrelavant in decision making

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.