\"In my opinion, we ought to stop making our own drums and accept that outside s
ID: 2600589 • 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 $21 per drum, we would be paying $5.10 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 $331,500." Antilles Refining's current cost to manufacture one drum is given below (based on 65,000 drums per year) Direct materials Direct labor Variable overhead Fixed overhead ($3.30 general $12.00 6.00 2.00 company overhead, $2.00 depreciation, and, 0.80 supervision) 6.10 Total cost per drum $26.10 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 $156,000 per year Alternative 2: Purchase the drums from an outside supplier at $21 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 20%. The old equipment has no resale value. Supervision cost $52,000 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. Assuming that 65,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 2. Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?Explanation / Answer
It is assumed Company General ohs will be incurred even company purchase from outside Inhouse Outside Required(Units) 65,000 65000 21 1365000 variable Cost(P/U) 12 7,80,000 Less: Profit on rent of M/C (26,000) Direct Labor=6*(1-.2) 4.8 3,12,000 Net cost 13,39,000 Varaible Ohs=2*(1-.2) 1.6 1,04,000 Gen. Ohs irrelavent cost Depn 1,30,000 Supervision Cost 52,000 Total Cost 13,78,000 Decision: Purchase outside As mfg cost 1378000>1339000 80,000 Drums Inhouse Outside Required(Units) 80,000 80000 21 1680000 variable Cost(P/U) 12 9,60,000 Less: Profit on rent of M/C (26,000) Direct Labor=6*(1-.2) 4.8 3,84,000 Net cost 16,54,000 Varaible Ohs=2*(1-.2) 1.6 1,28,000 Gen. Ohs irrelavent cost - Depn 1,30,000 Supervision Cost 52,000 Total Cost 16,54,000 Assumed company don't have orders to produce more than 80,000 drums Relevant cost 16,54,000 Decision: indifferent as As mfg cost 1654000=purchase cost 1654000 100,000 Drums Inhouse Outside Required(Units) 1,00,000 100000 21 2100000 variable Cost(P/U) 12 12,00,000 Less: Profit on rent of M/C 16,80,000 Direct Labor=6*(1-.2) 4.8 4,80,000 Net cost 37,80,000 Varaible Ohs=2*(1-.2) 1.6 1,60,000 Gen. Ohs irrelavent cost - Depn 1,30,000 Supervision Cost 52,000 Total Cost 20,22,000 Decision: Manufacture inside As mfg cost 1862000< 3780000 Working Notes If rent , the relavent cost is depreciation Relevant cost 1,30,000 Rental income 1,56,000 Net profit 26,000 Financial advantage/(disadvanatge) if purchase outside 65000 Drums 39,000 80000 Drums - 100000 Drums (17,58,000)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.