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jccengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do CengageNOW | Online tea... " 01- Check My Work eBook Video Exercise 23-2 Outsourcing Decision Cyber Queen Services' manager must decide whether to hire a new employee or to outsource some of the web design work to Kai Yu, a freelance graphic designer. If she hires a new employee, she will pay $30 per design hour for the employee to work 500 hours and incur service overheed costs of $2 per design hour. If she outsources the work to Kai Yu, she will pay $34 per design hour for 500 hours of work. She will also redirect the use of a computer and server to generate $4,000 in additional revenue from web pege maintenance work. hire a new designer or outsource the work to Kal Yu? saved? 1000 per year Hide Feedback In manufacturing companies, a common decision facing managers is whether to make or to buy some or all of the parts used in product assembly. The goal is to select the more profitable choice by identifying each alternativea analysis g the costs of each alternative and their effects on revenue and existing costs. Managers need the following information for this Information About Buying Information About Making

Explanation / Answer

Here, in the given case, whether the new employee should be hired for the task or the task should be outsourced is purely dependent on the cost effectiveness. The Manager will take that option where the cost will be less.

therefore we will calculate the cost incurred in both the cases separately and compare those.

Option 1 : If a new employee is hired, the cost will be :

                                                                                                      $

                  Payment to Employee (500 hrs x $30hr)                15,000

                  Overhead cost (500 hrs x $2hr)                               1,000

                                                                   Net cost     16,000

Option 2 : If the work is outsourced to Kai Yu, the cost will be :

                   Payment to Kai Yu (500 hrs x $34hr)    17,000

   Additional revenue geneated if the employee

   is not hired ( from the use of computer)      (4,000)

Net Cost          13,000

        There will be no overhead cost if the work is outsourced.

Decision: Total net cost if the employee is hire will be $17,000, however it is only $13,000 in case of        outsourcing. Therefore the Manager should go for Option 2 i.e. Outsourcing.

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