Direct Materials $10.60 Direct Labor 5.00 Variable Overhead 1.50 Fixed overhead

Question

Direct Materials $10.60

Direct Labor 5.00

Variable Overhead 1.50

Fixed overhead ($3.60 general company overhead, $2.00 depreciation, and, $1.10 supervision) $6.70

Total cost per drum $23.80

..1 Verizon 3:57 PM 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 $4.80 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 $336,000. Antiles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year) Direct labor Variable overhead Fixed overhead ($3.60 general company overhead, $2.00 depreoiation, and, $1.10 supervision) Total cost per 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 wom 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 S231,000 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 20%. The old equipment has no resale value. Supervision cost ($77,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 110,000 drums per year The company's total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.) 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 altenatives 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 intemally 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 96,250 drums if they are manufactured intenally?

Explanation / Answer

a)

**General cost and supervision cost are irrelevant as they are not effected by making drums internally or purchasing

b)cost per drum : 1337000/70000 = $ 19.10

c)The drums should be purchased from outside supplier as it will cost only $ 19 per drum as against by manufacturing internally

2a-1)

Direct material [70000*10.60] 742000 Direct labor [70000*5*(1-.20less due to new machine)] 280000 variable overhead [70000*1.50*(1-.20)] 84000 Fixedoverhead-Rent of new equipment 231000 Total cost 1337000

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