A yellow Pages directory company must decide whether it should compose the ads f

Question

A yellow Pages directory company must decide whether it should compose the ads for its clients in-house or pay a production company to compose them. To develop the ads in-house, the company will have to purchase computers, printers, and other peripherals at a cost of $12000. The equipment will have a useful life of 3 years, after which it will be sold for $2000. The employee who creates the ads will be paid $45000 per year. In addition, each ad will have an average cost of $8 to prepare for delivery to the printer. A total of 40000 ads are anticipated for the next few years. Alternatively, the company can outsource ad development at a fee of $20 per ad regardless of the quantity. The current interest rate is 8% per year. What is the breakeven amount and which alternative is economically better?

Explanation / Answer

F=P(1+i)n

Case I:- Buy equipment

IC=12000

N = 3 years

S=2000

MC=45000 per year

VC= 8 per add

I= 8% per year

X= ads

Case II:- Outsource $20 per ad

Breakeven :-

-12000(F/P,8%,3) +2000-45000(A/F,8%,3) -8X =-20X

-12000(1.26) +2000-45000(0.308) -8X =-20X

-15120+2000-13846.15=-12X

X=2247.18

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