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

Demron

Outsourcing welding or Purchasing a welding machine for in-house welding:

Cost of outsourcing:

Variable cost = $1.50 x 35,000 = $52,500

Fixed cost                                        45,000

Total outsourcing costs               $97,500

Cost of purchasing a welding machine:

Fixed cost =                          $13,500

Maximum Variable costs = $84,000

Total in-house cost =          $97,500

Maximum variable cost per weld

= $84,000/35,000

= $2.40

Explanation:

This problem of outsourcing welding activities of Demron Company or buying the welding machine to enable in-house welding is like a make or buy decision challenge.  The appropriate approach to tackling this challenge is to determine the total costs under each option.  The option that yields the greater outcome is chosen.  However, for Demron's case, a determination of the maximum variable costs that are acceptable for in-house option to be selected is made.  The level required for this determination is the level of costs that makes no difference between outsourcing and in-housing welding.