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 $156,000 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 the manufacturer, would reduce direct labor and variable overhead costs by 20%. The old equipment has no resale value. Supervision cost ($52,000 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 year.
The company’s total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.)
1. To assist the managing director in making a decision, prepare an analysis showing the total cost and the cost per drum for each of the two alternatives given above. Assume that 65,000 drums are needed each year.
a. What will be the total relevant cost of 65,000 drums if they are manufactured internally as compared to being purchased?
b. What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.)
2a-1. What will be the total relevant cost of 80,000 drums if they are manufactured internally?
2a-2. What would be the per unit cost of drums?
2b-1. What will be the total relevant cost of 100,000 drums if they are manufactured internally?
2b-2. What would be the per unit cost of drums? (Round your answer to 2 decimal places.)