Question
In: Accounting
Problem 2 – Make versus Buy (Outsource): RealEstate Nerds Co. needs a new designing software for...
Problem 2 – Make versus Buy (Outsource):
RealEstate Nerds Co. needs a new designing software for
providing potential client with a clear 5D design of their home if
they choose to remodel it using the company’s designs. Currently
they design for 1,000 clients annually. Software engineering
resources (personnel and lab) to complete the development of the
software will cost $3,000 per week. If the engineers don’t work on
this project, they will be assigned to another. The approximate
cost per usage of their own software is estimated to be $50/design
usage which includes labor costs for an individual to input the
customer data and overhead costs.
Software Solutions, Inc., already has a 6D model software that
is already developed and is very similar to the one that RealEstate
Nerds needs. If the Nerds choose to outsource this software usage,
Software Solution can make the necessary changes to suit what the
Nerds need in just 4 weeks, at a price of $60/design usage. With
Software Solutions version of the software, customers can put in
their own data and no additional overhead would be incurred.
Required:
a. Should RealEstate Nerds go forward with their own software,
or should it accept Software Solution’s offer?
b. If RealEstate Nerds decided to outsource the new module to
Software Solution, how much would the other projects that
RealEstate Nerds’ engineers work on have to return/save to make
outsourcing financially beneficial?
Solutions
Expert Solution
In the above question, Real Estate Nerds Co. wants to do a comparitive study of both the options- Firstly: Inhouse development of software; Secondly: Outsourcing usage of software.
Option 1- Inhouse Development
Since the labour of the Co. can be assigned to another project. Thus, this means that the personnel is permanent therefore there cost is sunk and not relevant. therefore it will not be considered in calculating relevant cost of this option.
The relevant cost to execute option 1 is $ 50/design usage.
Option 2- Outsourcing to Software Solutions Inc.
the relevant cost to execute option 2 is $60 /design usage.
(a) Analysis- There is savings of ($60-$50)= $10/ design usage If Real Estate Nerds Co. chooses inhouse devlopment of its own software instead of outsourcing.
(b) If Real Estate Nerds Co. chooses to go for Softwae solution inc. then Real Estate Nerds Co. shall have to save $10 on other projects to make the outsourcing finanially beneficial.
ekkarill92 answered 1 year agoRelated Solutions
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