Please help me.. I can\'t get this one right.. \"In my opinion, we ought to stop
ID: 2584603 • Letter: P
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Please help me.. I can't get this one right..
"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 $19 per drum, we would be paying $5.80 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 $406,000. Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year) Direct materials Direct labor Variable overhead Fixed overhead ($3.80 general company overhead, $1.50 $10.60 6.00 2.00 6.20 $ 24.80 depreciation, and , S0.90 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 $189,000 per year Alternative 2: Purchase the drums from an outside supplier at $19 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 ($63,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 100,000 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 alternatives given above. Assume that 70,000 drums are needed each year a. What will be the total relevant cost of 70,000 drums if they are manufactured internally as compared to being purchased? Total relevant cost (70,000 drums)Explanation / Answer
Current cost structure Total Cost-Current structure Proposed Cost Structure Proposed Cost Structure Direct Material 10.60 742,000 10.60 742,000 Direct labor 6.00 420,000 4.20 294,000 Variable overhead 2.00 140,000 1.40 98,000 Fixed Overhead - General company overhead 3.80 266,000 3.80 266,000.00 Depreciation 1.50 105,000 - Supervision 0.90 63,000 0.90 63,000.00 Equipment rent - - 2.70 189,000.00 Total Cost 24.80 1,736,000 23.60 1,652,000 Proposed Cost structure Labor reduced by 30% Variable overhead reduced by 30% equipment rent-189000 Per unit rent- 189000/70000=2.70 Solution A & B Total Relevant cost for 70000 units Proposed Cost Structure Proposed Cost Structure Direct Material 10.60 742,000 Direct labor 4.20 294,000 Variable overhead 1.40 98,000 Fixed Overhead General company overhead - - Depreciation - Supervision 0.90 63,000 Equipment rent 2.70 189,000 Total Cost 19.80 1,386,000 Solution C Since outside supply cost is 19 as compared to 19.80 so it is recommended to purchase from outside. Solution 2 A1 and 2A2 Total Relevant cost for 90000 units Proposed Cost Structure Proposed Cost Structure Direct Material 10.60 954,000 Direct labor 4.20 378,000 Variable overhead 1.40 126,000 Fixed Overhead General company overhead - - Depreciation - Supervision 0.70 63,000 Equipment rent 2.10 189,000 Total Cost 19.00 1,710,000 Equipment rent will be same but since the manufacture level is increased so the per unit cost gets reduced. Solution 2 A3 Since outside supply cost is 19 and manufacturing cost is also 19 so we will be indifferent in taking the decision. Solution 2 B1 and 2B2 Total Relevant cost for 100000 units Proposed Cost Structure Proposed Cost Structure Direct Material 10.60 1,060,000 Direct labor 4.20 420,000 Variable overhead 1.40 140,000 Fixed Overhead General company overhead - - Depreciation - Supervision 0.63 63,000 Equipment rent 1.89 189,000 Total Cost 18.72 1,872,000 Equipment rent will be same but since the manufacture level is increased so the per unit cost gets reduced. Solution 2 A3 Since outside supply cost is 19 as compared to 18.072 so it is recommended to manufacture internally
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