Widgets, Inc. can have their widgets made by gluing them at half the cost of wel
ID: 2812165 • Letter: W
Question
Widgets, Inc. can have their widgets made by gluing them at half the cost of welding them. However, 75% of the glued widgets will be returned within the one-year warranty period for repairs, whereas welded widgets have never been returned within the one-year warranty. The following additional data are available:
Cost of a welded widget = $375
Cost of repairing a widget = $75
Number widgets sold/year = 125,000
What is the yearly cost savings that Widgets, Inc. obtains by gluing widgets compared to welding them?
Explanation / Answer
Cost of a welded widget = $375
Cost of a glued widget = 375 x 1/2
= $187.5
Number widgets sold/year = 125,000
Hence, cost of gluing = 125,000 x 187.5
= $23,437,500
75% of the glued widgets will be returned within the one-year warranty period for repairs.
Hence, number of widets returned for repairs = 125,000 x 75%
= 93,750
Cost of repairing a widget = $75
Hence, total cost of repairing = 93,750 x 75
= $7,031,250
Hence, total annual cost when widets are made by gluing = Cost of gluing + Cost of repairing
= 23,437,500 + 7,031,250
= $30,468,750
Cost of a welded widget = $375
Hence, annual cost of welding the widgets = 125,000 x 375
= $46,875,000
Hence, yearly cost savings that Widgets, Inc. obtains by gluing widgets compared to welding them = annual cost of welding the widgets - total annual cost when widets are made by gluing
= 46,875,000 - 30,468,750
= $16,406,250
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