Zipco is in serious negotiations to purchase a chunking machine that will enable them to perform their own chunking at $1 per unit.They currently have their chunking outsourced at a cost of $1.50 per unit and a fixed cost of $45,000.Their marketing team feel that they can sustain an annual volume of 10,000 units.What is the maximum fixed cost that Zipco should be willing to bear in order to perform their own chunking?
A) $50,000
B) $45,000
C) $40,000
D) $35,000

Question

Quizplus · Accepted Answer

The cost savings per unit by performing their own chunking is $0.50 ($1.50 - $1.00). For 10,000 units, this results in savings of $5,000. Therefore, the maximum fixed cost they should be willing to bear is the current fixed cost minus the savings, which is $45,000 + $5,000 = $50,000.

Zipco Is in Serious Negotiations to Purchase a Chunking Machine