Problem 7-28 Make or buy Analysis {LO-7-3} “in my opinion, weought to stop making our own drums and accept that outside acceptsupplier’s offer,” said Wim Niewindt, managing director of AntillesRefining, N.V, of Aruba. “At a price of $18 per drum, we would bepaying $5 less, than it costs us to manufacture the drums in ourown plant. Since we use 60,000 drums a year that would be an annualcost savings of $300,000. Antilles Refining’s current cost tomanufacture one drum is given below (based on 60,000 drum peryear).

Direct Materials	10.35
Direct Labor	6.00
Variable Overhead	1.50
Fixed overhead (2.80 general company overhead, $1.60depreciaiton and $0.75 Supervision)	5.15
Total Cost per drum	$23.00

A decision about whether to make or buy the drums is especiallyimportant at this time because the equipment being used to make thedrums is completely worn out and must be replaced, the choicesfacing the company are; Alternative 1: rent new equipment andcontinue to make the drums. The equipment would be rented for$135,000 per year. Alternative 2: Purchase the drums from anoutside supplier at $18 per drum. The new equipment would be moreefficient than the equipment that Antilles refining has been andaccording to the manufacturer, would reduce direct labor andvariable overhead costs by 30%. The old equipment has no resalevalue. Supervision cost ($45,000 per year) and direct material costper drum would not be affected by the new equipment. The newequipment’s capacity would be 90,000 drums per year. The company’stotal general company overhead would be unaffected by thisdecision. 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 alternative given above. Assume that60.000 drums are needed each year. Which course of action would yourecommend to the managing director? 2. Would your recommendation inrequirement 1 be the same if the company’s need were: (a) 75000drums per year or (b) 90,000 drums per year? Show computation tosupport your answer, with costs presented on both a total a perunit basis. 3. What other factors would you recommend that thecompany consider before making a decision?