Question

Gizmo, Inc. is a diversified multinational manufacturer. The CEO is considering outsourcing the marketing research function...

  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

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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.
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