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 ago

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