Question

You are the project manager for a software development project for an updated management system. The cost of doing it in-house is $27,000. You estimate you'll spend $2,000 per month updating the software with client information, government regulations, and maintenance.

You know that a contractor do the programming for your company and charge a fee based on the number of personnel using the program every month. This contractor will charge you $4 per month per user of the accounting system. You will have roughly 1,000 employees using the system each month. You'll need some additional in-house resources to manage the contract, per se, at a rate of an extra $1,100 per month.

(a) How many months can you use the system before it's better to do it in-house instead of hiring a contractor. Show your work! USE THE ALGEBRAIC FORMULATION OF THE PROBLEM! In other words, set the cost of contracting it out equal to the cost of doing it in-house, and solve for the break-even time.

(b) Outsourcing involves more than just possibly saving money. List at least five other factors that should be considered in making this outsourcing decision.

Answer 1

Cost of doing it in-house= Fixed cost + variable cost per month

= $27000+$2000*T

Here T shows the months

Cost of outsourcing/contracting

number of employee*cost per employee* number of the month= 1000*$4*T=$4000T

In-house resources per month cost = $1100*T

equating them

$4000T+$1100T= $27000+$2000T

=>$5100T-$2000T= $27000

=>$3100T= $27000

=>T= 8.70

Rougly it will take 8.7 months to do it in-house

b) Factors to be considered while outsourcing

1. Technology: Whether the outsourcing agent have adequate technology t do the job
2. Communication: Whether the agent is receptive and can be accessed every time
3. Supervision: the contractor should work with minimal supervision and can arrange things on its own
4. Trained resources: The contractor should have trained staffs with the advanced technology to carry out the activities in a project
5. Reliable: the contractor should be reliable and has a reputation in the market.

Please comment if any doubt

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thanks