BKF.com provides banks access to sophisticated financial information and analysi

ID: 2776966 • Letter: B

Question

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 3,510 employee mailboxes:

Lee analyzed the computer hardware costs further and determined that:

$11,794 were allocated costs that will continue even if the email system is abandoned.

$4,493 were non-personnel direct costs that will be avoided if the email system is abandoned.

$11,794 were monthly salaries for two, equally paid interns who worked only on the email system.

Mail.com, a leading provider of internet messaging outsourcing services, has offered to host BKF.com's email function for $12.60 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 $3,000 a month.

Finally, Lee estimates that 4,000 mailboxes will be required per month next year.

REQUIRED

By 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 $18,252 Virus protection license 5,616 Miscellaneous 7,020 Fixed Costs Computer hardware 28,080 Total $58,968

Explanation / Answer

Make option

Variable Costs

Email license

$18,252

Virus protection license

5,616

Miscellaneous

7,020

Total variable cost

30,888

No. of mailboxes = 3510

Variable cost per mailbox = Total variable cost/ no. of mailboxes

= 30,888/ 3,510

= 8.80

Total variable cost for 4,000 mailboxes = variable cost per unit x 4000

= 8.80 x4, 000

=35,200

Total cost of make option = Total variable cost + total fixed cost

= 35,200 +28,080

=60,280

Buy Option

Cost per mailbox = 12.60

Total cost of mailbox = 12.60x 4000 = 50,400

Unavoidable fixed cost = 11,794

Salary of one intern 11794/2 =5897

Rental earnings =-3000

Total cost =65,091

Since cost of make is lower than cost of buy, it is not recommended to get this service outsourced.

Difference in cost = 60,280 -65,091 = --4,811