1. Assuming that 60,000 drums are needed each ycar, what is the financial advantage (disadvan-tage) of buying the drums from an outside supplier?2. Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvan-tage) of buying the drums from an outside supplier?3. Assuming that 100,000 drums are needed each year, what is the financial advantage (disad-vantage) of buying the drums from an outside suppljer? PROBLEM 13-28 Make or Buy Decisions LO13-3"In my opinion, we ought to stop making our own drums and accept that outside supplier'soffer," said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. "At a priceof $18 per drum, we would be paying $5.20 less than it costs us to manufacture the drums in ourown plant. Since we use 60,000 drums a year, that would be an annual cost savings of $312,000."Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drumsper year):Direct materials.$10.35Direct labor6.10Variable overhead....Fixed overhead ($2.80 generalcompany overhead, $1.60 depreciationand, $0.75 supervision)1.605.15Total cost per drum$23.20A decision about whether to make or buy the drums is especially important at this timebecause 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 rentedfor $135,800 per year.Alternative 2: Purchase the drums from an outside supplier at $18 per drum.The new equipment would be more efficient than the equipment that Antilles Refining hasbeen using and, according to the manufacturer, would reduce direct labor and variable overheadcosts by 30%. The old equipment has no resale value. Supervision cost ($45,000 per year) anddirect materials cost per drum would not be affected by the new equipment. The new equipment'scapacity would be 100,000 drums per year.The company's total general company overhead would be unaffected by this decision.

A make-or-buy decision seems to be a behaviour of employing cost-benefit analysis to make a…

Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvan- tage) of buying the drums from an outside supplier? Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvan- tage) of buying the drums from an outside supplier? Assuming that 100,000 drums are needed each year, what is the financial advantage (disad- vantage) of buying the drums from an outside supplier?

Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvan- tage) of buying the drums from an outside supplier? Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvan- tage) of buying the drums from an outside supplier? Assuming that 100,000 drums are needed each year, what is the financial advantage (disad- vantage) of buying the drums from an outside supplier?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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