In this make or buy problem, you should compute the total cost of making a parti

Question

In this make or buy problem, you should compute the total cost of making a particular part and the total costs of buying the same part. Try following the solutions steps:

Note that the question does not ask for the total make costs and the total buy costs but instead asks for the difference between the two. Make sure that you round your unit cost computations as instructed and that you submit the answer as a positive or a negative number as instructed.
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BKF.com provides banks access to sophisticated financial information and analysis via the web, enabling them to instantly evaluate both personal and commercial loan applications. To better focus on its client services, BKF.com is considering outsourcing some of its internal functions. Its controller, Jenny Lee, suggests starting with the company's internal email system. She recently attended a conference and learned that GTE and NBC outsource their email function to companies such as Google and Yahoo. Lee began her analysis by identifying the total costs related to last month's in-house email operation, when there were 3,680 employee mailboxes:

Lee analyzed the computer hardware costs further and determined that:

Mail.com, a leading provider of internet messaging outsourcing services, has offered to host BKF.com's email function for $13.50 per mailbox. BKF.com will still need to pay for the virus protection software, and it will need one of the interns to maintain the virus protection and quarantine suspicious emails. Also, another company has agreed to rent some of the computer storage space that will be available if BKF.com outsources its email function for $5,000 a month.

Finally, Lee estimates that 3,870 mailboxes will be required per month next year.

REQUIREDBy how much will BKF.com's monthly profits change if they decide to outsource its email function to Mail.com instead of managing the service internally?   (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)

Variable Costs      Email license $16,928        Virus protection license $7,360        Miscellaneous $10,304   Fixed Costs      Computer hardware $41,216   Total $75,808  

Explanation / Answer

Hi,

Please find the detailed answer as follows:

License Cost Per Employee = Total Email License Costs/Employee Mailboxes = 16928/3680 = 4.6

Miscellaneous Cost Per Employee = Total Miscellaneous Costs/Employee Mailboxes = 10304/3680 = 2.8

Option 1: Make

Email License = 4.6*3870 = 17802

Miscellaneous = 2.8*3870 = 10836

Fixed Cost = 41216 (Computer Hardware Costs)

Total = Email License + Miscellaneous + Fixed Cost = 17802 + 10836 + 41216 = 69854

Option 2: Buy

Allocated Costs = 48%*41216 = 19783.68

Salary (1 Employee) = (Computer Hardware - Direct Cost - Allocated Costs)/2 = (41216 - 20%*41216 - 19783.68)/2 = 6594.56

Mail Hosting Charge = 13.50*3870 = 52245

Money Received from Another Company = -5000

Total = Allocated Costs + Salary (1 Employee) + Mail Hosting Charge - Money Received from Another Company = 19783.68 + 52245 + 6594.56 - 5000 = 73623.24

Net Change in Profit = 69854 - 73623.24 = -3769.24

Answer is -3769.24

Thanks.

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