"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make adecision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internallyor whether it should discontinue production and purchase them from an outside supplier. The alternatives follow:SavedAlternative 1: Rent new equipment for producing the oil drums for $208,000 per year.Alternative 2: Purchase oil drums from an outside supplier for $18.90 each.Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs arebased on a current activity level of 40,000 units per year:Direct materialsDirect labourVariable overheadFixed overhead ($2.60 supervision, $1.90 depreciation, and $5.00 general company overhead)Total cost per unit$5.408.002.009.50$24.90The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variableoverhead costs by 25%. Supervision cost ($104,000 per year) and direct materials cost per unit would not be affected by the newequipment. The new equipment's capacity would be 65,000 oil drums per year.The total general company overhead would be unaffected by this decision.Total relevant cost (40,000 subassemblies)Required:1. Seebach is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the twoalternatives given above. Assume that 40,000 oil drums are needed each year.a. What will be the total relevant cost of 40,000 subassemblies if they are manufactured internally as compared to being purchased? 15esa-3. Which course of action would you recommend if 52,000 assemblies are needed each year?O Purchase from the outside supplierO Indifferent between the two alternativesO Manufacture internallyb-1. What will be the total relevant cost of 65,000 subassemblies if they are manufactured internally?Total relevant cost (65,000 subassemblies)b-2. What would be the per unit cost of subassembly manufactured internally? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)Per unit cost of subassembly+b-3. Which course of action would you recommend if 65,000 assemblies are needed each year?O Indifferent between the two alternativesPurchase from the outside supplier< Prev6 of 6Next >

"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $208,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $18.90 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year:

"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $208,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $18.90 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year:

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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