Question

"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, m
anaging director of Antilles Refining, N.V., of Aruba. "At a price of 96 florins per drum, we would be paying 10 florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Afl.) Since we use 220,000 drums a year, we would save 2,200,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 220,000 drums per year):​

Answer 1

1-a. The calculation of the total costs and costs per drum assuming 220,000 drums are needed each year by Antilles Refining is as follows:

                                          Per Unit Costs                Total Costs (220,000)

                                         Make           Buy            Make              Buy

Outside supplier's price                 Afl 196.00                        Afl 43,120,000

Direct materials        Afl 30.70                          Afl 6,754,000

Direct labor                     15.40                               3,388,000

Variable overhead           9.10                               2,002,000

Total variable costs Afl 55.20       Afl 196.00 Afl 12,144,000 Afl 43,120,000

Depreciation expense               Afl 495,000          495,000

Supervision cost                           2,530,000      2,530,000

Total relevant costs                                      Afl 15,169,000 Afl 43,120,000

1-b. The company should make the drums.

2-a. The calculation of the total costs and costs per drum assuming 250,000 drums are needed each year by Antilles Refining is as follows:

                                          Per Unit Costs                Total Costs (250,000)

                                         Make           Buy            Make              Buy

Outside supplier's price              Afl 196.00                       Afl 49,000,000

Direct materials        Afl 30.70                        Afl 7,675,000

Direct labor                     15.40                             3,850,000

Variable overhead           9.10                              2,275,000

Total variable costs Afl 55.20    Afl 196.00 Afl 13,800,000 Afl 49,000,000

Depreciation expense               Afl 495,000         495,000

Supervision cost                           2,875,000      2,875,000

Total relevant costs                                      Afl 17,170,000 Afl 49,000,000

2-b. The company should make the drums.

2-c. The calculation of the total costs and costs per drum assuming 2,530,000 drums are needed each year by Antilles Refining is as follows:

                                          Per Unit Costs                Total Costs (2,530,000)

                                         Make           Buy          Make              Buy

Outside supplier's price            Afl 196.00                       Afl 495,880,000

Direct materials        Afl 30.70                       Afl 77,671,000

Direct labor                     15.40                           38,962,000

Variable overhead           9.10                            23,023000

Total variable costs Afl 55.20 Afl 196.00  Afl 139,656,000 Afl 495,880,000

Depreciation expense               Afl 495,000        495,000

Supervision cost                           2,875,000  29,095,000

Total relevant costs                                 Afl 169,246,000 Afl 495,880,000

2-d. The company should make the drums.

What is a buy-or-make decision?

A buy-or-make decision involves the choice of alternatives depending on relevant costs (avoidable costs).

Question Requirements:

Required: 1-a. Calculate the total costs and costs per drum under the two alternatives. Assume that 220,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.)

1-b. Should the company make or buy based on analysis in part (1-a)

2-a. Calculate the total costs and costs per drum under the two alternatives. Assume that 250,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.)

2-b. Should the company make or buy based on analysis in part (2-a)?

2-c. Calculate the total costs and costs per drum under the two alternatives. Assume that 2,530,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.)

2-d. Should the company make or buy based on analysis in part (2-c)?

Learn more about buy-or-make decisions at https://brainly.com/question/13574882