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A company needs to decide regarding its worn-out equipment. It can either purchase new equipment...

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Accounting

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A company needs to decide regarding its worn-out equipment. It can either purchase new equipment and continuing to make oil drums internally or it can discontinue production and purchase them from an outside supplier. They can rent new equipment to produce the oil drums for $120,000 per year or they can purchase the drums from outside supplier for S16 each. Cost data based on the current activity level of 40,000 units per year is summarized below: Direct materials $5.50 Direct labour 8.00 Variable overhead Fixed overhead ($1.50 supervision, $1,80 depreciation, and general $4.00 7.30 Total cost per unit $22.00 1.20 The new equipment would be more efficient and is expected to reduce direct labour and variable overhead by 25% The current supervision costs of $60,000 and direct materials would not be affected by the new equipment. The new equipment would have the capacity to produce 60,000 drums per year. Required: In good presentation format, prepare an analysis that show the difference between making or buying and ignoring qualitative considerations, make a recommendation as to what the company should do

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