In my opinion, we ought to stop making our own drums and accept that outside sup

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 $17 per drum, we would be paying $6.85 less than it costs us to manufacture the drums in our own plant. Since we use 50,000 drums a year, that would be an annual cost savings of $342,500.” Antilles Refining’s current cost to manufacture one drum is given below (based on 50,000 drums per year):

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 $135,000 per year.

Alternative 2: Purchase the drums from an outside supplier at $17 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 40%. The old equipment has no resale value. Supervision cost ($45,000 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 alternatives given above. Assume that 50,000 drums are needed each year.

  
     

a. What will be the total relevant cost of 50,000 drums if they are manufactured internally as compared to being purchased?

    

b. What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.)

c. Which course of action would you recommend to the managing director?

  

2a-1. What will be the total relevant cost of 100,000 drums if they are manufactured internally?

       

2a-2. What would be the per unit cost of drums?

2 a-3. What course of action would you recommend if 100,000 drums are needed each year?

  

2b-1. What will be the total relevant cost of 125,000 drums if they are manufactured internally?

        

2b-2. What would be the per unit cost of drums? (Round your answer to 2 decimal places.)

2b-3. What course of action would you recommend if 125,000 drums are needed each year?

Direct materials $ 10.40 Direct labor 6.50 Variable overhead 1.50 Fixed overhead ($2.90 general company overhead, $1.65     depreciation, and, $0.90 supervision) 5.45 Total cost per drum $ 23.85

Explanation / Answer

1. An analysis showing the Total cost and the Cost per Drum for 50,000 drum

Alternative 2 - Buy from outside supplier @ $ 17 per drum

a. Relevant cost for Drum to be manufacture internally would be equal to its Purchase cost $ 17. General company overhead assume to be un affected in any situation hence total cost would be 17+2.9 = $19.9

b. Current cost per unit of Drum manufacturing internally would be $ 21.7

c. From the above analusis we would like to suggest managment to purchase drum from outside party instead of manufacture internally. It will save cost of $ 1.8 per unit

2a1. Total relevant cost of manufacturing 100,000 drums internally. Assume all cost per unit will be remain same

2a2. per unit cost of drums = $ 20.35

2a3. From the above analusis we would like to suggest managment to purchase drum from outside party instead of manufacture internally. It will save cost of $ 0.45 per unit

2b1. Total relevant cost of manufacturing 125,000 drums internally. Assume all cost per unit will be remain same

2b2. per unit cost of drums = $ 20.08

2b3. From the above analusis we would like to suggest managment to purchase drum from outside party instead of manufacture internally. It will save cost of $ 0.18 per unit

Alternative 1 - Rent New Equiptment Direct Material 10.4 Direct Labour 3.9 Variable Overhead 0.9 General Company Overhead 2.9 Supervision 0.9 Rent Cost (50,000 drums per year) 2.7 Total cost per drum 21.7

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

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