Unformatted text preview: panies must constantly assess the opportunities for
improved results via outsourcing.
The outsourcing decision process should include an analysis of all relevant costs and benefits. Items
that differ between the “make” alternative and the “buy” alternative should be studied. As usual,
avoid the temptation to consider sunk costs as part of the decision analysis. Generally, one would
compare the variable production/manufacturing cost of a service/product with the purchase price of
the service/product. Unless the outsourcing option results in a complete elimination of a factory or
facilities, the fixed overhead is apt to continue whether the service/product is purchased or
produced. As a result, unavoidable fixed overhead does not vary between the alternatives and can be
disregarded. On the other hand, if some fixed factory overhead can be avoided by outsourcing, it
should be taken into consideration as a relevant item. Download free ebooks at bookboon.com
10 Business Decision Logic Analytics for Managerial Decision Making 2.2 Outsourcing Illustration Please click the advert You’re full of energy
and ideas. And that’s
just what we are looking for. © UBS 2010. All rights reserved. Pilot Corporation produces software for handheld global positioning systems. The software provides
a robust tool for navigational support and mapping. It is used by airline pilots, mariners, and others.
Because these applications are often of critical importance, Pilot maintains a tech support
department that is available around the clock to answer questions that are received via e-mail,
phone, and IM. The annual budget for the tech support department is shown below. Direct labor to
staff the tech support department consists of three persons always available during each 8-hour shift,
at an hourly rate of $12 per hour (3 persons per shift X 8 hours per shift X 3 shifts per day X 365
days per year X $12 per hour = $315,360). The utilities and maintenance are fixed, but would be
avoided if the unit were shut down. The...
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