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“In my opinion, weought to stop making our own drums and accept that outsidesupplier’s offer,” said Wim Niewindt, managing director of AntillesRefining, N.V., of Aruba. “At a price of $20 per drum, we would bepaying $6.40 less than it costs us to manufacture the drums in ourown plant. Since we use 65,000 drums a year, that would be anannual cost savings of $416,000.” Antilles Refining’s current costto manufacture one drum is given below (based on 65,000 drums peryear):

Directmaterials	$	10.50
Directlabor		8.00
Variableoverhead		2.00
Fixed overhead($3.20 general company overhead, $1.80 depreciation, and $0.90supervision)		5.90
Total cost perdrum	$	26.40

A decision aboutwhether to make or buy the drums is especially important at thistime because the equipment being used to make the drums iscompletely worn out and must be replaced. The choices facing thecompany are:

Alternative1: Rent new equipment and continue to make the drums. Theequipment would be rented for $175,500 per year.

Alternative2: Purchase the drums from an outside supplier at $20 perdrum.

The new equipmentwould be more efficient than the equipment that Antilles Refininghas been using and, according to the manufacturer, would reducedirect labor and variable overhead costs by 35%. The old equipmenthas no resale value. Supervision cost ($58,500 per year) and directmaterials cost per drum would not be affected by the new equipment.The new equipment’s capacity would be 90,000 drums per year.

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

Required:

1. Assuming that65,000 drums are needed each year, what is the financial advantage(disadvantage) of buying the drums from an outside supplier?

2. Assuming that78,000 drums are needed each year, what is the financial advantage(disadvantage) of buying the drums from an outside supplier?

3. Assuming that90,000 drums are needed each year, what is the financial advantage(disadvantage) of buying the drums from an outside supplier?