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 3,650 employee mailboxes:

Variable Costs
Email license	$20,440
Virus protection license	3,650
Miscellaneous	8,030
Fixed Costs
Computer hardware	32,120
Total costs	$64,240

Lee analyzed the computer hardware costs further and determined that:

47% were allocated costs that will continue even if the email system is abandoned.

19% were non-personnel direct costs that will be avoided if the email system is abandoned.

34% 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 $13.20 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 $4,100 a month to use the computer storage space that will become available if BKF.com outsources its email function.

Finally, Lee estimates that 3,980 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

VARIABLE COST FOR NEXT YEAR ON PER MONTH BASIS

PARTICULAR	AMOUNT	MAIL BOX	PER MAIL BOX	MAIL BOX REQUIRED	VARIABLE COST PER MONTH FOR NEXT YEAR
EMAIL LICENCE	20440	3650	5.6	3980	22288
VIRUS PROTECTION LICENCE	3650	3650	1.0	3980	3980
MISCELLANEOUSE	8030	3650	2.2	3980	8756
TOTAL					35024

COST ANALYSIS FOR IN HOUSE MANAGEMENT V/S OUTSOURSE

COST	IN HOUSE MANAGEMENT	OUTSOURSE TO MAIL.COM	EXPLANATION
EMAIL LICENCE	22288	0	AVOIDABLE COST IF OUTSOURSED
VIRUS PROTECTION LICENCE	3980	3980	UNAVOIDABLE AND PAYABLE IN BOTH THE CASES
MISCELLANEOUSE	8756	0	AVOIDABLE COST IF OUTSOURSED
COMPUTER HARDWARE	15096.40	15096.40	47 % ALLOCATED COST AND UNAVOIDABLE
COMPUTER HARDWARE	6102.80	0	19 % NON PERSONNEL AND AVOIDABLE
COMPUTER HARDWARE	10920.80	5460.40	34 % SALARY OF INTEREN HALF AVOIDABLE AS ONLY 1 INTERN IS REQUIRED IF OUTSOURSED
OUTSOURSING FEES	0	52536	PAYABLE TO MAIL.COM @ $13.20 FOR 3980 MAIL BOXES
TOTAL COST	67144	77072.80
REVENUE FOR COMPUTER STORAGE SPACE	0	4100	ADDITIONAL REVENUE IF OUTSOURSED
NET COST	67144	72972.80

CHANGE IN PROFIT IF THEY DECIDE TO OUTSOURCE EMAIL FUNCTION

= COST OF MANAGING IN HOUSE - NET COST IF OUTSOURSED

= 67144 – 72972.80

=   - 5828.80 $

COMPANY SHOULD NOT OUTSOURSE IT’S EMAIL FUNCTION AS IT WOULD RESULT IN EXTRA COST OF $ 5828.80.