Question

1. 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 $1,300,000. At present, the costs of operating the marketing research department are $1,508,000 per year, as follows:

Director salary                        $146,000

Staff salaries                           890,000

Travel                                     137,000

Occupancy                                  84,000

Consultants                                 90,000

Executive VP                              75,000

Overhead                                    40,000

Miscellaneous                            46,000

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 her salary; the market research director reported to her. 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.

Please also show Excel Calculations

Answer 1

	Do not Outsource	Outsource	Increase ( decrease) in Net Operating Income
Miscellaneous Expenses	$ 46,000	$ 0	$ 46,000
Travel Costs	137,000	13,700	123,300
Director Salary	146,000	0	146,000
Staff Salaries	890,000	0	890,000
Consultant costs	90,000	0	90,000
Occupancy	84,000	84,000	0
Overhead	40,000	40,000	0
Executive	75,000	75,000	0
Totals	$ 1,508,000	$ 212,700	$ 1,295,300

Of the $ 1,508,000 costs being currently incurred. $ 212,700 would continue even if the marketing research function is outsourced. Therefore the net cost savings are only $ 1,295,300. Therefore, it does not make financial sense to outsource the function at $ 1,300,000. Outsourcing can be resorted to only if the outsourcing cost is less than the cost saving of $ 1,295,300.

Apart from the cost factors, the CEO should also consider the following qualitative factors:

• The track record and competence of the global consulting firm.
• Gizmo Inc. would need to share business secrets with the outsourcing firm.
• Gizmo Inc. would have to let go of its trained market research employees.