Question

A bank is considering two alternatives for handling a projected total number of 15,000,000 service calls in the next 5 years. (You should treat those 5 years as one time period.) If the bank sets up its own service call center in the U.S., the fixed cost is estimated to be $3,800,000, and the variable cost is calculated to be 25 cents per call. If the call service is outsourced to a foreign company, the fixed cost would be $210,000, and the unit charge would be 45 cents per call.   (a)What is the break?even number of service calls? (Rounded up if necessary) (b) Draw a diagram representing the in?house and outsourcing total costs which are functions of the number of service calls. Indicate the break?even number of service calls on the diagram.   (c) Would the bank set up its own service call center or outsource service call handlings? Explain your answer with calculations. (d)If the projected number of service calls is 19,000,000 for the next 5 years, would the bank change its decision in part (c)? Again, explain with calculations.

Answer 1

Breakven number of service calls = (fixed cost of one method) / (Revenue per service call (R) - Variable cost of service call as per the method)

For example, for outsourcing, Breakeven number of calls = (210,000) / (R - 0.25)

The "R" is missing in this case. All the calculations described below are based on total cost of handling the service calls. Assume "R" was $ 1 then , breakeven calls for outsourcing = 210,000 / 0.55 = 381,818 calls and for bank handled service center = 3,800,000 / 0.75 = 5,066,666

• For 15,000,000 calls, bank should outsource the call center
• For 19,000,000 calls, bank should handle service center itself