Please show step by step instruction on how to do these problems. I am having a
ID: 370444 • Letter: P
Question
Please show step by step instruction on how to do these problems. I am having a real hard problem figuring these problem out. Thank you in advance.
"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 $19 per drum, we would be paying $5.80 less than it costs us to manufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $406,000 Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year) Direct materials Direct labor Variable overhead Fixed overhead ($3.80 general company overhead, $1.50 10.60 6.00 2.00 6.20 24.80 depreciation, and , S0.90 supervision) Total cost per drum 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 $189,000 per year Alternative 2: Purchase the drums from an outside supplier at $19 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 30%. The old equipment has no resale value. Supervision cost ($63,000 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.) Required 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 70,000 drums are needed each year a. What will be the total relevant cost of 70,000 drums if they are manufactured internally as compared to being purchased? Total relevant cost (70,000 drums) b. What would be the per unit cost of each drum manufactured internally? (Round your answer to 2 decimal places.) Per unit cost of drumExplanation / Answer
Variable costs per unit
Materials = 10.60
Direct labor cost = 6*(1-0.3) = 4.20
Variable overhead = 2*(1-0.3) = 1.40
Fixed costs
Equipment rental = 189,000
General company overhead = 3.8*70000 = 266,000
Supervision = 63,000
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1a. Total relevant cost (70,000 drums) = Variable cost per unit * 70000 + Fixed cost = (10.6+4.2+1.4)*70000 + 189000 + 266000 + 63000 = $ 1,652,000
1b. per unit cost of drum = 1,652,000 / 70,000 = $ 23.60
1c. Purchase from outside supplier (Outside supplier cost ($ 19) is still less than the internal manufacturing ($ 23.6)
2a-1. Total relevant cost (90,000 drums) = (10.6+4.2+1.4)*90000 + 189000 + 266000 + 63000 = $ 1,976,000
2a-2. Per unit cost of drum = 1976000/90000 = $ 21.96
2a-3. Purchase from outside supplier (Outside supplier cost ($ 19) is still less than the internal manufacturing ($ 21.96)
2b-1. Total relevant cost (100,000 drums) = (10.6+4.2+1.4)*100000 + 189000 + 266000 + 63000 = $ 2,138,000
2b-2. Per unit cost of drum = 2138000/100000 = $ 21.38
2b-3. Purchase from outside supplier (Outside supplier cost ($ 19) is still less than the internal manufacturing ($ 21.38)