Lon-Capa Question 4: X Company is considering outsourcing its email system. Tota

Question

Lon-Capa Question 4:

X Company is considering outsourcing its email system. Total costs related to last month's in-house email operation, when there were 3,685 employee mailboxes, were as follows: Variable costs: Email license $19,899 Virus protection license 5,896 Miscellaneous 8,844 Fixed costs Computer hardware 35,376 $15,212 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 $11.50 per mailbox. Next year, X Company estimates that 3,900 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

Monthly profits will increase by $ ( 50,584 - 44, 850) = $ 5,734, if X Company decides to outsource its email function to Y Company.

In-house email system Outsource email system Variable costs: Email license $ 21,060 Miscellaneous $ 9,360 Avoidable fixed cost $ 20,164 Outsourcing cost $ 44,850 Total costs $ 50,584 $ 44,850

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