The outsourcing firm would perform all duties currently performed by Gizmo perso

Question

The outsourcing firm would perform all duties currently performed by Gizmo personnel, as well as those of the external consultants. Miscellaneous expenses (supplies, etc.) would be eliminated. Travel costs would decline 90%. Occupancy costs reflect internal charge for office space in corporate headquarters. Cost for Executive VP reflect a charge for 15% of that individual’s time. Overhead is an allocation of general corporate overhead. Required: Discuss the factors that the CEO should consider in deciding whether to outsource the marketing research function. 24 points

Gizmo, Inc. is a diversified multinational manufacturer. The CEO is considering outsourcing the marketing research function to a global consulting firm. The consulting firm would charge a fixed annual fee of $1,100,000. At present, the costs of operating the marketing research department are $1,315,000 per year, as follows: 4. Director salarv Staff salaries Travel Occupancy Consultants Executive VP Overhead Miscellaneous $130,000 800,000 105,000 75,000 80,000 60,000 20,000 45,000

Explanation / Answer

Ans. Total Effective cost of outsourcing the marketing research function.

Annual Fees charged by the firm               : $1100000

Add: Other cost

Travel cost saving (105000)X.10    : $10500

Net effective cost    $1110500

Calculation of existing Relevant cost for running marketing Research function

Total given cost    : $1315000

Less: Irrelevant cost            

Allocated O/h    : ($20000)

VIP cost    : ($60000)

Occupancy cost : ($75000)

Net relevant cost    : $1160000                 

Comment : it is better to outsourced marketing research function because relevant cost is less than the inhouse cost.

Outsourcing cost is : 1110500

Inhouse cost is : 1160000

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