Question

In: Accounting

“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...

“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 $20 per drum, we would be paying $5.45 less than it costs us to manufacture the drums in our own plant. Since we use 80,000 drums a year, that would be an annual cost savings of $436,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 80,000 drums per year):

Direct materials $ 12.00
Direct labor 6.50
Variable overhead 1.50
Fixed overhead ($2.90 general
company overhead, $1.80 depreciation,
and, $0.75 supervision)
5.45
Total cost per drum $ 25.45

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 $180,000 per year.

Alternative 2: Purchase the drums from an outside supplier at $20 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 30%. The old equipment has no resale value. Supervision cost ($60,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity would be 150,000 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 80,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 150,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

Solutions

Expert Solution

Cost Sheet for making 80000 drums internally
Direct mterial          9,60,000
Direct labor          3,64,000
Variable overhead             84,000
Equipment Rent          1,80,000
Supervision             60,000
Cost of making the drums (A)        16,48,000
Cost of Buying (B)        16,00,000
Advantage (Disadvantage) (A-B)             48,000
Since the cost of drum is lower in buying outside the drum should be bought instead of making the same.
Cost Sheet for making 100000 drums internally
Direct mterial        12,00,000
Direct labor          4,55,000
Variable overhead          1,05,000
Equipment Rent          1,80,000
Supervision             60,000
Cost of making the drums (A)        20,00,000
Cost of Buying (B)        20,00,000
Advantage (Disadvantage) (A-B)                      -  
Since cost of buying and making the drum is same there is no advantage or disadvantage
Cost Sheet for making 150000 drums internally
Direct mterial        18,00,000
Direct labor          6,82,500
Variable overhead          1,57,500
Equipment Rent          1,80,000
Supervision             60,000
Cost of making the drums (A)        28,80,000
Cost of Buying (B)        30,00,000
Advantage (Disadvantage) (A-B)        -1,20,000
Since the cost of drum is higher in buying outside the drum should be made instead of buying.
Please give ratings to my answer as your feedback is very important to me.
Please reach out to me in the comment section in case of any clarification or queries.

Related Solutions

“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $20 per drum, we would be paying $5.25 less than it costs us to manufacture the drums in our own plant. Since we use 95,000 drums a year, that would be an annual cost savings of $498,750.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $7.05 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 $458,250.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $5.80 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 $406,000.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $20 per drum, we would be paying $4.45 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 $289,250.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $6.45 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 $387,000.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $4.85 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 $242,500.” Antilles Refining’s current cost to manufacture one drum is given below...
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s...
“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 $6.25 less than it costs us to manufacture the drums in our own plant. Since we use 75,000 drums a year, that would be an annual cost savings of $468,750.” Antilles Refining’s current cost to manufacture one drum is given below...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT