PROBLEM 11-28 Make or Buy Decisions LO11-3 "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 $18 per drum, we would be paying $5.20 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 $312,000." Antilles Refining's current cost to manu- facture one drum is given below (based on 60,000 drums per year): Direct materials. Direct labor... Variable overhead. inmant Fixed overhead ($2.80 general company overhead, $1.60 depreciation, and $0.75 supervision).. Total cost per drum.... $10.35 6.10 1.60 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: 5.15 $23.20 Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $135,800 per year. Alternative 2: Purchase the drums from an outside supplier at $18 per drum. Differential Analysis: The Key to Decision Making

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
Question 1 listed under required
PROBLEM 11-28 Make or Buy Decisions LO11-3
"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 $18 per drum, we
would be paying $5.20 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 $312,000." Antilles Refining's current cost to manu-
facture one drum is given below (based on 60,000 drums per year):
Direct materials.
Direct labor...
Variable overhead.
Fixed overhead ($2.80 general company
overhead, $1.60 depreciation, and $0.75 supervision)
Total cost per drum.
$10.35
6.10
1.60
5.15
$23.20
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
$135,800 per year.
Alternative 2: Purchase the drums from an outside supplier at $18 per drum.
year.
The company's total general company overhead would be unaffected by this decision.
Differential Analysis: The Key to Decision Making
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 equipment's capacity would be 100,000 drums per
Required:
1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of
buying the drums from an outside supplier?
2. Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvantage) of
buying the drums from an outside supplier?
3. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of
buying the drums from an outside supplier?
4. What other factors would you recommend that the company consider before making a decision?
Transcribed Image Text:PROBLEM 11-28 Make or Buy Decisions LO11-3 "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 $18 per drum, we would be paying $5.20 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 $312,000." Antilles Refining's current cost to manu- facture one drum is given below (based on 60,000 drums per year): Direct materials. Direct labor... Variable overhead. Fixed overhead ($2.80 general company overhead, $1.60 depreciation, and $0.75 supervision) Total cost per drum. $10.35 6.10 1.60 5.15 $23.20 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 $135,800 per year. Alternative 2: Purchase the drums from an outside supplier at $18 per drum. year. The company's total general company overhead would be unaffected by this decision. Differential Analysis: The Key to Decision Making 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 equipment's capacity would be 100,000 drums per Required: 1. Assuming that 60,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 2. Assuming that 80,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 4. What other factors would you recommend that the company consider before making a decision?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Quality control
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education