Question

American Printing Company’s information technology department administers the company’s material requirements planning and general ledger systems. It also provides support to the computer-based shop floor reporting and payroll systems, as well as personnel computing services for each department’s administration.

Recently, American Printing’s Controller, Sally Sound, has been considering outsourcing IT operations to Cloud computing providers to minimize support department expenses. She has been reviewing potential contracts with Cloud suppliers, and interviewed the managers of departments that receive support from the current IT department. Sally Sound determines that the cost savings are approximately $250,000 for the company. Its revenues are presently $50 million.

For this discussion:

What are the qualitative considerations for the elimination of support departments when strategically minimizing costs?

What are the quantitative considerations that the Controller must include in the calculation?

What might the inputs in the decision be if the space and labor costs can be removed in the short run of one year?

Answer 1

The qualitative considerations which the company has to consider before eliminating the support departments or outsourcing it to minimize the cost are:

1) Quantum of services provided by the service department of total sales.

2) Quality of services required to maintain the production level and its quality.

3) Is third party, proposed to be hired for services, is capable one.

4) The quality of service level maintained by the outsource agency.

The quantitative considerations that Controller must be calculate are:

1) Total Fixed cost of establishing department : The one time fixed cost required to establish the service department if the outsourcing will not accepted.

2) The variable cost of service department : The cost of services which will vary with the quantum of output. Is the variable costs are justified.

3) The Elimination loss : The elimination loss which the company has to face if service department does not exist.

4) Service charges on outsourcing : The service charges being undertaken for the services of third party.

5) Loss on lapses by outsourcing party : The controller have to calculate the loss of production if outsourcing fails.

If the space and labor costs are removed in short term, then other inputs of considerable nature are:

1) Spare parts : The repair and spare parts cost which the services departments are incurring.

2) Overhead incurred : The overheads incurred by the services departments to maintain the operations of the department for uninterrupted services.

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