Sunny Hazel, the manager of Cyber Web Services, must decide whether to hire a ne

Question

Sunny Hazel, the manager of Cyber Web Services, must decide whether to hire a new employee or to outsource some of the web design work to Ky To, a freelance graphic designer. If she hires a new employee, she will pay $32 per design hour for the employee to work 600 hours and incur service overhead costs of $2 per design hour.If she outsources the work to Ky To, she will pay $36 per design hour for 600 hours of work. She can also redirect the use of a computer and server to generate $4,000 in additional revenue from web page maintenance work.
Should Cyber Web Services hire a new designer or outsource the work to Ky To?

Explanation / Answer

It effectively costs Sunny $34 per hour to hire a new employee ($32 wage + $2 OH). Outsourcing to Ky To costs $36 per hour. Over 600 hours, that means that the employee will cost $20,400, while Ky To will cost $21,600. Thus far, it would be more profitable to hire a new employee. But if the work is outsourced, Sunny gains an extra $4000 revenue, bringing the net expense of outsourcing to $17,600. Therefore, since it will only cost $17,600 to outsource, Sunny should outsource the work.

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