Question

In this make or buy problem, you should compute the total cost of making a particular part and the total costs of buying the same part. Try following the solutions steps:

Determine the parameters of the make cost function - the variable costs per unit and the fixed costs.

Determine the fixed costs that are avoidable and the fixed costs that are unavoidable.

Determine the buy price.

Determine the alternative use of the idle resources under the buy,

Note that the question does not ask for the total make costs and the total buy costs but instead asks for the difference between the two. Make sure that you submit the answer as a positive or a negative number as instructed.
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BKF.com provides banks access to sophisticated financial information and analysis via the web, enabling them to instantly evaluate both personal and commercial loan applications. To better focus on its client services, BKF.com is considering outsourcing some of its internal functions. Its controller, Jenny Lee, suggests starting with the company's internal email system. She recently attended a conference and learned that GTE and NBC outsource their email function to companies such as Google and Yahoo. Lee began her analysis by identifying the total costs related to last month's in-house email operation, when there were 3,950 employee mailboxes:

Variable Costs
Email license	$18,170
Virus protection license	7,900
Miscellaneous	8,690
Fixed Costs
Computer hardware	34,760
Total costs	$69,520

Lee analyzed the computer hardware costs further and determined that:

41% were allocated costs that will continue even if the email system is abandoned.

20% were non-personnel direct costs that will be avoided if the email system is abandoned.

39% were monthly salaries for two, equally paid interns who worked only on the email system.

Mail.com, a leading provider of internet messaging outsourcing services, has offered to host BKF.com's email function for $14.10 per mailbox. BKF.com will still need to pay for the virus protection software, and it will need one of the interns to maintain the virus protection and quarantine suspicious emails. Also, a company has agreed to pay BKF.com $4,800 a month to use the computer storage space that will become available if BKF.com outsources its email function.

Finally, Lee estimates that 4,220 mailboxes will be required per month next year.

REQUIRED

By how much will BKF.com's monthly profits change if they decide to outsource its email function to Mail.com instead of managing the service internally?   (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)

Answer 1

SATEMENT SHOWING COST BREAK UP OF VARIBLE AND FIXED

Particulars	Cost	Unit	Cost per unit
VARIABLE COST
Email Licence	$ 18,170.00	3950	$                4.60
Virus protection	$    7,900.00	3950	$                2.00
Miscellaneous	$    8,690.00	3950	$                2.20
FIXED COST
Allocated(UnAvoidable)	$ 14,251.60
(41% of 34,760
Direct cost (Avoidable)	$    6,952.00
(20% of 34,760)
Interns (2 Interns)	$ 13,556.40	2	$       6,778.20
(39% of 34,760)

IN CASE OF MAKE OR INHOUSE

Particulars	Cost per unit	Unit	Total Cost
VARIABLE COST
Email Licence	$                4.60	4220	$ 19,412.00
Virus protection	$                2.00	4220	$    8,440.00
Miscellaneous	$                2.20	4220	$    9,284.00
FIXED COST			$34,760.00
TOTAL COST =			$ 71,896.00

IN CASE OF OUTSOURCE

PARTICULAS	AMOUNT
Outsource Payment to Mail.com	$     59,502.00
($14.10 * 4,220)
Allocated cost (Unavoidable)	$     14,251.60
Cost of Virus protection	$       8,440.00
($2 * 4220)
1 Interns to manage Virus Protection	$       6,778.20
Savings in outsourcing computer storage	$     (4,800.00)
TOTAL COST OF OUTSOURCING=	$     84,171.80

So Outsourcing cost us more and Hence the profit of BKF.Com will change negetavely. i.e. Profit will fall.

Profit will change by = ($71,896 - $84,171.80) i.e. - $12,275.80

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