Demron is in serious negotiations to purchase a welding machine that will enable them to perform their own welding.They currently have their welding outsourced at a cost of $1.50 per weld and a fixed cost of $45,000.Their marketing team feel that they can sustain an annual sales volume sufficient to require 35,000 welds.If a fancy new welding rig costs $13,500 what is the maximum variable cost per weld that Demron should be willing to pay in order to bring this process in-house?
A) $3.00 per weld
B) $2.40 per weld
C) $2.00 per weld
D) $1.45 per weld

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost of outsourcing 35,000 welds:
$1.50 per weld x 35,000 welds = $52,500
Adding the fixed cost of $45,000, the total cost of outsourcing is $97,500.

Now we need to calculate the maximum variable cost per weld that Demron should be willing to pay to bring the process in-house. We can do this by subtracting the cost of outsourcing from the cost of in-house welding and dividing by the number of welds:
Cost of in-house welding = $13,500 + (variable cost per weld x 35,000 welds)
Maximum variable cost per weld = (Cost of in-house welding - Cost of outsourcing) / 35,000 welds

Plugging in the values:
$13,500 + (variable cost per weld x 35,000 welds) = $97,500
Variable cost per weld = ($97,500 - $13,500) / 35,000 welds = $2.40 per weld

Therefore, Demron should be willing to pay up to $2.40 per weld in variable costs to bring the process in-house. The answer is B).

Demron Is in Serious Negotiations to Purchase a Welding Machine