"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 $5.35 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $321,000." Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead ($3.00 general company overhead, $1.70 depreciation, and $0.70 supervision) Total cost per drum $ 10.45 7.00 1.50 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 $168,000 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 ($42,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 140,000 drums per year. The company's total general company overhead would be unaffected by this decision. Brou 5.40 $24.35 Required: 1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums 8 of 9 w ble
"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 $5.35 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $321,000." Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drums per year): Direct materials Direct labor Variable overhead Fixed overhead ($3.00 general company overhead, $1.70 depreciation, and $0.70 supervision) Total cost per drum $ 10.45 7.00 1.50 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 $168,000 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 ($42,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 140,000 drums per year. The company's total general company overhead would be unaffected by this decision. Brou 5.40 $24.35 Required: 1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums 8 of 9 w ble
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Propiem 11-20 (Aigo) Makе оr вuу Decisions (LUTI-SJ
"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 $5.35 less than it
costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost
savings of $321,000." Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drums per
year):
Direct materials
Direct labor
Variable overhead
Fixed overhead ($3.00 general company overhead,
$1.70 depreciation, and $0.70 supervision)
Total cost per drum
$10.45
7.00
1.50
5.40
$ 24.35
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Check my work
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 $168,000 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 ($42,000 per year) and direct materials cost per drum would not be affected by the new equipment. The
new equipment's capacity would be 140,000 drums per year.
The company's total general company overhead would be unaffected by this decision.
Required:
1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums
8 of 8 #
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Transcribed Image Text:Supervision cost ($42,000 per year) and direct materials cost per drum would not be affected by the new equipment. The
new equipment's capacity would be 140,000 drums per year.
The company's total general company overhead would be unaffected by this decision.
Required:
1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums
from an outside supplier?
2. Assuming that 120,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums
from an outside supplier?
3. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums
from an outside supplier?
(For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations. Do not
leave any cells blank.)
Production Needs Financial advantage
(in number of
drums)
60,000
120,000
140,000
(disadvantage) of
buying the drums
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