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“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
florins per drum, we would be paying 7.34 florins less than it
costs us to manufacture the drums in our own plant. (The currency
in Aruba is the florin, denoted below by fl.) Because we use 48,000
drums a year, that would be an annual cost savings of 352,320
florins.” Antilles Refining’s present cost to manufacture one drum
is given below (based on 48,000 drums per year):

 

 

 

  Direct materials

fl 11.65  

  Direct labor

6.10  

  Variable overhead

1.60  

  Fixed overhead (fl2.70 general company overhead,
      fl1.41 depreciation and, fl0.88
supervision)

4.99  

  Total cost per drum

fl 24.34  

 

       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 fl141,240 per year.

Alternative 2:

Purchase the drums from an outside supplier at fl17 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 15%. The old equipment has no resale
value. Supervision cost (fl42,240 per year) and direct materials
cost per drum would not be affected by the new equipment. The new
equipment’s capacity would be 99,000 drums per year.

 

    The company’s total general company
overhead would be unaffected by this decision.

 

Requirement 1:

The president is unsure what the company should do and would
like an analysis showing the drum costs and total costs for each of
the two alternatives given above. Assume that 48,000 subassemblies
are needed each year.

 

(a)

What will be the total relevant cost of 48,000 subassemblies if
they are manufactured internally as compared to being purchased?
(Do not round your intermediate calculation. Omit the “fl”
sign in your response.)

  

(b)

What would be the per drum cost of the each subassembly
manufactured internally? (Do not round your intermediate
calculation. Round your answer to 2 decimal
places. Omit the “fl” sign in your response.)

 
 

(c)

Which course of action would you recommend to the president?

 

 

 

 

 

Requirement 2:

(a)

What will be the total relevant cost of 76,000 subassemblies if
they are manufactured internally? (Round your intermediate
calculation to two decimal places and final answer to the nearest
whole number. Omit the “fl” sign in your response.)

 
 

(b)

What would be the per drum cost of subassembly? (Do not
round your intermediate calculation. Round your
answer to 2 decimal places. Omit the “fl” sign in your
response.)

 

(c)

Which course of action would you recommend if 76,000 assemblies
are needed each year?

 

 

 

 

 

Requirement 3:

(a)

What will be the total relevant cost of 99,000 subassemblies if
they are manufactured internally? (Omit the “fl” sign in
your response.)

 

  Total relevant cost

 

(b)

What would be the per drum cost of subassembly? (Round
your answer to 2 decimal places. Omit the “fl” sign in your
response.)

 

  Cost of subassembly

 

(c)

Which course of action would you recommend if 99,000 assemblies
are needed each year?

 

 

 

 

 

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