Problem:

Zipco is in serious negotiations to purchase a chunking machine that will enable them to perform their own chunking at $1.25 per unit. They currently have their chunking outsourced at a cost of $1.75 per unit and a fixed cost of $50,000. Their marketing team feels that they can sustain an annual volume of 15,000 units.

Required:

Question 1) What is the maximum fixed cost that Zipco should be willing to bear in order to perform their own chunking?

A) $55,500

B) $52,500

C) $50,000

D) $57,500

Solve the problem and show all work.