Chapter 7, Problem 7.28P

1.

To determine

Introduction: The difference in costs between the variable alternative is used to calculate financial advantage and disadvantage.

The financial advantage or disadvantage of purchasing drums from outside if the company needs 60,000 drums per year.

Answer to Problem 7.28P

The financial advantage is $36000 if the drums are purchased from outside supplier

Explanation of Solution

	Differential Cost per D		Total Differential Cost 60000 drums
	Make $	Buy	Make	Buy
Outside supplier’s price		18		1,080,000
Direct material	10.35		621000
Direct labor	4.20		252000
Variable overhead	1.05		63000
supervision	0.75		45000
Equipment rental	2.25		135000
Total cost	18.60	18	116000	1,080,000

Financial advantage:

  $\begin{array}{l}financialadvantage=Differential\cos tofmaking-Differential\cos tofbuying\\ =\$4,116,000-\$1,080,000\\ =\$36,000\end{array}$

Therefore, financial advantage is $36000 if the drums are purchased from outside supplier

Given that making new equipment reduces direct labor and variable overhead cost by 30% so it is taken as 70% ( $100\%-30\%$ )

Equipment rental is $135000 per year here we need per drum cost so

  $\begin{array}{l}Equipment\cos tperdrum=\frac{135,000}{60,000}\\ =\$2.25\end{array}$

2.

To determine

Introduction: The difference in costs between the variable alternative is used to calculate financial advantage and disadvantage.

The financial advantage or disadvantage of purchasing drums from outside if the company needs 75,000 drums per year.

Answer to Problem 7.28P

The financial advantage is $0 if the drums are purchased from outside supplier

Explanation of Solution

	Differential Cost per D		Total Differential Cost 60000 drums
	Make $	Buy	Make	Buy
Outside supplier’s price		18		1,350,000
Direct material	10.35		776250
Direct labor	4.20		315000
Variable overhead	1.05		78750
supervision	0.75		45000
Equipment rental	2.25		135000
Total cost	18.60	18	1350000	1350000

Financial advantage:

  $\begin{array}{l}financialadvantage=Differential\cos tofmaking-Differential\cos tofbuying\\ =\$1,350,000-\$1,350,000\\ =\$0\end{array}$

Therefore, financial advantage is $0 if the drums are purchased from outside supplier

Equipment rental is $135000 per year here we need per drum cost so

  $\begin{array}{l}Equipment\cos tperdrum=\frac{135,000}{75,000}\\ =\$1.80\end{array}$

Supervision cost also declined with increase drums.

3.

To determine

Introduction: The difference in costs between the variable alternative is used to calculate financial advantage and disadvantage.

The financial advantage or disadvantage of purchasing drums from outside if the company needs 90,000 drums per year

Answer to Problem 7.28P

The financial advantage is $36000 if the drums are purchased from outside supplier

Explanation of Solution

	Differential Cost per D		Total Differential Cost 60000 drums
	Make $	Buy $	Make $`	Buy $
Outside supplier’s price		18		1,620,000
Direct material	10.35		931,500
Direct labor	4.20		378,000
Variable overhead	1.05		94,500
supervision	0.75		45,000
Equipment rental	2.25		135,000
Total cost	18.60	18	1,584,000	1,620,000

Financial advantage:

  $\begin{array}{l}financialadvantage=Differential\cos tofmaking-Differential\cos tofbuying\\ =\$1,620,000-\$1,584,000\\ =\$36,000\end{array}$

Therefore, financial advantage is $36000 if the drums are purchased from outside supplier

Equipment rental is $135000 per year here we need per drum cost so

  $\begin{array}{l}Equipment\cos tperdrum=\frac{135,000}{90,000}\\ =\$1.50\end{array}$

Supervision cost also declined with increase drums.

4.

To determine

Introduction: The difference in costs between the variable alternative is used to calculate financial advantage and disadvantage.

The factors recommended for the company before making a decision.

Answer to Problem 7.28P

The factors are given below.

Explanation of Solution

The other factors that need to be considered by the firm before decision making are:

1. Requirement of the quality of material and the quality supplied by the supplier
2. Quantity of the drums produced in the future
3. Cost of material and labor in future.
4. Rely on single supplier by the company.
5. Supplier capability of delivering the material on time.