“In my opinion, we ought to stop making our own drums and acceptthat outside supplier’s offer,” said Wim Niewindt, managingdirector of Antilles Refining, N.V., of Aruba. “At a price of $20per drum, we would be paying $4.25 less than it costs us tomanufacture the drums in our own plant. Since we use 75,000 drums ayear, that would be an annual cost savings of $318,750.” AntillesRefining’s current cost to manufacture one drum is given below(based on 75,000 drums per year): Direct materials $ 11.10 Directlabor 6.00 Variable overhead 1.60 Fixed overhead ($2.80 generalcompany overhead, $1.75 depreciation, and, $1.00 supervision) 5.55Total cost per drum $ 24.25 A decision about whether to make or buythe drums is especially important at this time because theequipment being used to make the drums is completely worn out andmust be replaced. The choices facing the company are: Alternative1: Rent new equipment and continue to make the drums. The equipmentwould be rented for $225,000 per year. Alternative 2: Purchase thedrums from an outside supplier at $20 per drum. The new equipmentwould be more efficient than the equipment that Antilles Refininghas been using and, according to the manufacturer, would reducedirect labor and variable overhead costs by 25%. The old equipmenthas no resale value. Supervision cost ($75,000 per year) and directmaterials cost per drum would not be affected by the new equipment.The new equipment’s capacity would be 125,000 drums per year. Thecompany’s total general company overhead would be unaffected bythis decision. (Round all intermediate calculations to 2 decimalplaces.) Required: 1. To assist the managing director in making adecision, prepare an analysis showing the total cost and the costper drum for each of the two alternatives given above. Assume that75,000 drums are needed each year. a. What will be the totalrelevant cost of 75,000 drums if they are manufactured internallyas compared to being purchased? b. What would be the per unit costof each drum manufactured internally? (Round your answer to 2decimal places.) c. Which course of action would you recommend tothe managing director? Purchase from the outside supplierManufacture internally Indifferent between the two alternatives2a-1. What will be the total relevant cost of 93,750 drums if theyare manufactured internally? 2a-2. What would be the per unit costof drums? 2 a-3. What course of action would you recommend if93,750 drums are needed each year? Indifferent between the twoalternatives Manufacture internally Purchase from the outsidesupplier 2b-1. What will be the total relevant cost of 125,000drums if they are manufactured internally? 2b-2. What would be theper unit cost of drums? (Round your answer to 2 decimal places.)2b-3. What course of action would you recommend if 125,000 drumsare needed each year? Manufacture internally Purchase from theoutside supplier Indifferent between the two alternatives