Concept explainers
Make or Buy Decisions
“In my opinion, we ought to stop making our own drums and accept that outside suppliers offer,’ said Wim Niewindt, managing director of Antilles Refining, NY., of Aruba At a price of $18 per drum, we would be paving $5 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 $300,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 60,000 drums per year):
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 $135000 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 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 ($45,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipments capacity would be 90,000 drum 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 vent, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
2. Assuming that 75,000 drums are needed each war, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
3. Assuming that 90,000 drums are needed each vent, 1at is the financial advantage (disadvantage) of buying the drums from an outside supplier?
4. What other factors would von recommend that the company consider before making a decision?
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INTRO MGRL ACCT LL W CONNECT
- "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. Because we use 80,000 drums a year, that equals 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 Direct labor Variable overhead Fixed overhead ($2.90 general company overhead, $1.80 depreciation, and $0.75 supervision) Total cost per drum A decision about whether to make or buy the drums is especially important at this time because the equipment used to make the drums is completely worn out and must be replaced. The choices facing the company are: $ 12.00 6.50 1.50 Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $180,000 per year. Alternative 2: Purchase…arrow_forward"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 (based on 65,000 drums per year): Direct materials $10.95 Direct labor 7.00 Variable overhead 1.60 Fixed overhead ($2.50 general company overhead, $1.60 depreciation, and $0.80 supervision) 4.90 Total cost per drun $24.45 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 $156,000…arrow_forwardExpo Lube is interested in producing and selling an industrial line of oil filters. Market research indicates that wholesale customers are currently willing to pay $8 for similar filters, and that Expo Lube could sell 80,000 units per year at that price. a. If Expo Lube requires a 21 percent return on sales, what is its target cost for the proposed industrial line of filters? b. Assume that market research reveals several of Expo Lube’s direct competitors are likely to lower the wholesale price of similar filters to $7 per unit. To remain competitive, what will Expo Lube’s target cost have to be to maintain a 21 percent return on sales? c. At a wholesale price of $7, Expo Lube estimates that it can sell 83,800 industrial filters per year instead of 80,000 units. Assuming its target costs are attainable, how much more or less profit per year will the company earn at the $7 wholesale price compared to the initial wholesale price estimate of $8?arrow_forward
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