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 feels 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

To determine the maximum variable cost per weld that Demron should be willing to pay, we need to compare the cost of outsourcing versus bringing the process in-house.

Outsourcing cost:
$1.50 per weld x 35,000 welds = $52,500 variable cost + $45,000 fixed cost = $97,500 total cost

In-house cost:
$13,500 / 35,000 welds = $0.386 per weld + variable cost

We need to solve for the maximum variable cost that makes the in-house cost equal to the outsourcing cost:

$0.386 + variable cost = $1.50
variable cost = $1.50 - $0.386
variable cost = $1.114 per weld

Therefore, Demron should be willing to pay a maximum variable cost of $2.40 per weld ($1.114 rounded up to the nearest cent) to bring the welding process in-house and break even with outsourcing costs.

Demron Is in Serious Negotiations to Purchase a Welding Machine