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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, N.V., of Aruba. At a price of 60 florins per drum, we would be paying 10 florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Afl.) Since we use 100,000 drums a year, that would be an annual cost savings of 1,000,000 florins. Antilles Refinings present cost to manufacture one drum follows (based on 100,000 drums per year):

Direct material	Afl	24.70
Direct labour		16.00
Variable overhead		7.00
Fixed overhead (Afl9.60 general company overhead, Afl7.20 depreciation and, Afl5.50 supervision)		22.30
Total cost per drum	Afl	70.00

A decision about whether to make or buy the drums is especially important at this time, since the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are as follows:

	Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost Afl1,350,000; it would have a six-year useful life and no salvage value. The company uses straight-line depreciation.
	Alternative 2: Purchase the drums from an outside supplier at Afl60 per drum under a six-year contract.

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost (Afl550,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipments capacity would be 550,000 drums per year. The company has no other use for the space being used to produce the drums.

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

Required:

1-a.

Calculate the total costs and costs per drum under the two alternatives. Assume that 100,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) differential costs per drum total differential costs - 100, 000 drums make buy make buy outside supplier's price ? afl ? ? afl ? direct materials afl ? ? afl ? ? direct labour ? ? ? ? variable overheard ? ? ? ? supervision ? ? ? ? depreciation ? ? ? ? total cost afl 0.00 afl 0.00 afl 0 afl 0 1b) Should the company make or buy based on analysis in part (1-a)? yes/no? 2a) Calculate the total costs and costs per drum under the two alternatives. Assume that 125,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) differential costs per drum total differential costs - 100, 000 drums make buy make buy outside supplier's price ? afl ? ? afl ? direct materials afl ? ? afl ? ? direct labour ? ? ? ? variable overheard ? ? ? ? supervision ? ? ? ? depreciation ? ? ? ? total cost afl 0.00 afl 0.00 afl 0 afl 0 2b) Should the company make or buy based on analysis in part (2-a)? 2c) Calculate the total costs and costs per drum under the two alternatives. Assume that 550,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) differential costs per drum total differential costs - 100, 000 drums make buy make buy outside supplier's price ? afl ? ? afl ? direct materials afl ? ? afl ? ? direct labour ? ? ? ? variable overheard ? ? ? ? supervision ? ? ? ? depreciation ? ? ? ? total cost afl 0.00 afl 0.00 afl 0 afl 0 2d Should the company make or buy based on analysis in part (2-c)? make or buy? (check which boxes) 3. What other factors would you recommend that the company consider before making a decision? (Select all that apply.) - LIST THE ONES THAT DO APPLY... WHICH ONES APPLY? - changes in volume in future yeras - maintenance of quality if purchased for outside - changes in material and the cost - dependibility of outside in supplier - labour outlook in the supplier's industry - change in management in airlines industry - war in neighbouring country

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