> ID ezto.mheducation com Solwed: Accept or Reject a Assignment 5 Troy Eng y Eng

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> ID ezto.mheducation com Solwed: Accept or Reject a Assignment 5 Troy Eng y Engines, Lt Troy Engin Troy Engin value: 20.00 points Problem 9-7 Preparing a Make-or-Buy Analysis and Making an Equipment Replacement Decision (LO1 - CC2, 4) 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 120 fiorins per drum, we would be paying 10 florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Af.) Since we use 300,000 drums a year, we would save 3,000,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 300,000 drums per year): Direct material Direct labour Variable overhead Fixed overhead (l19.60 general company An 34.70 26.00 17.00 overhead, Af117.20 depreciation and, Afl15.50 supervision) 52.30 Total cost per drum Af 130.00 A decision about whether to make or buy the drums is especially important at this time, since the equipment being used to make the drums is completely worm out and must be replaced. The choices facing the company are as follows: Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost Af4,050,000; it would have a six-year useful life and no salvage value. The company uses straight-line depreciation. Alternative 2: Purchase the drums from an outside supplier at Al120 per drum under a six-year contract. The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost (A14,650,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 4,650,000 drums per year. The company has no other use for the space being used to produce the drums. The company's total general company overhead would be unaffected by this decision. Required 1-a.Calculate the total costs and costs per drum under the two altematives. Assume that 300,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) Differential Costs Per Drum Total Differential Costs--300,000 Drums Make Make Buy

Explanation / Answer

Requirement 1-a Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 300000 Make Buy Make Buy Outside supplier's Price 120 36000000 Direct Material 34.7 10410000 Direct Labor 18.2 5460000 Variable Overhead 11.9 3570000 Supervision 15.5 4650000 Depreciation 2.25 675000 Total costs 82.55 120 24765000 36000000 Requirement 1-b The company should make the drums Requirement 2-a Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 375000 Make Buy Make Buy Outside supplier's Price 120 45000000 Direct Material 34.7 13012500 Direct Labor 18.2 6825000 Variable Overhead 11.9 4462500 Supervision 12.4 4650000 Depreciation 1.8 675000 Total costs 79 120 29625000 45000000 Requirement 2-b The company should make the drums Requirement 2-c Calculation of total costs & costs per drum Differential cost per drum Total differential costs Units=drum 4650000 Make Buy Make Buy Outside supplier's Price 120 558000000 Direct Material 34.7 161355000 Direct Labor 18.2 84630000 Variable Overhead 11.9 55335000 Supervision 1 4650000 Depreciation 0.15 675000 Total costs 65.95 120 306645000 558000000 Requirement 2-d The company should make the drums

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