Required:1. Assuming that 70,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums froman outside supplier?2. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums froman outside supplier?3. Assuming that 175,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums froman outside supplier?(For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations. Do not leaveany cells blank.)Production Needs1.70,000 drums2. 140,000 drums3. 175,000 drumsFinancial advantage(disadvantage) ofbuying the drums4/ akAaces"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managingdirector of Antilles Refining, N.V., of Aruba. "At a price of $21 per drum, we would be paying $6.00 less than it costs us tomanufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $420,000"Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year):Direct materialsDirect laborVariable overheadFixed overhead ($3.30 general company overhead,$1.85 depreciation, and $1.10 supervision)Total cost per drum$11.008.501.256.25$ 27.00A decision about whether to make or buy the drums is especially important at this time because the equipment being used tomake 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 $231,000 per year.Alternative 2: Purchase the drums from an outside supplier at $21 per drum.The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to themanufacturer, would reduce direct labor and variable overhead costs by 20%. The old equipment has no resale value.Supervision cost ($77,000 per year) and direct materials cost per drum would not be affected by the new equipment. The newequipment's capacity would be 175,000 drums per year.The company's total general company overhead would be unaffected by this decision.

Only costs that will be impacted by the particular management decision under consideration are…

Required: 1. Assuming that 70,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 2. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 175,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? (For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations. Do not leave any cells blank.) Production Needs 1.70,000 drums 2. 140,000 drums 3. 175,000 drums Financial advantage (disadvantage) of buying the drums

Required: 1. Assuming that 70,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 2. Assuming that 140,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? 3. Assuming that 175,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier? (For all requirements, enter any "disadvantages" as a negative value. Do not round intermediate calculations. Do not leave any cells blank.) Production Needs 1.70,000 drums 2. 140,000 drums 3. 175,000 drums Financial advantage (disadvantage) of buying the drums

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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