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X Company is considering outsourcing its email system. Total costs related to la

ID: 2463056 • Letter: X

Question

X Company is considering outsourcing its email system. Total costs related to last month's in-house email operation, when there were 3,650 employee mailboxes, were as follows: $13,096 of the computer hardware costs were common costs that will continue even if the email system is abandoned, and X Company will still need to pay for the virus protection license. Y Company has offered to operate an email system for X Company for $12.50 per mailbox. Next year, X Company estimates that 4,005 mailboxes will be required per month. By how much will X Company's monthly profits change if they decide to outsource its email function to Y Company instead of managing the service internally? [A positive number means that make costs are more than buy costs; a negative number means that make costs are less than the buy costs.]

Explanation / Answer

Particulars

Total

Fixed

Variable

Email Service

         17,520

         17,520

Virus Protection

           4,380

         4,380

                  -  

Miscellaneous

         18,980

         18,980

No of Units

           3,650

Cost per Unit

             5.20

Comaparative Cost statement

Particualars

Own

Outsourcing

No of Units

     4,005.00

        4,005.00

Variable Cost per unit

             5.20

              12.50

Total Variable cost

   20,826.00

      50,062.50

Unavoidable Virus Protection

     4,380.00

        4,380.00

Fixed Cost

   28,470.00

      13,096.00

Total Cost

         53,676

            67,539

As inhouse making is less cost better not to outsource

Particulars

Total

Fixed

Variable

Email Service

         17,520

         17,520

Virus Protection

           4,380

         4,380

                  -  

Miscellaneous

         18,980

         18,980

No of Units

           3,650

Cost per Unit

             5.20