Question

Please show work behind reasoning.

2. 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.

Answer 1

Saving By  accepting the proposal = $1508000 -$1300000

= $208000

After accepting the proposal cost of operating company has to bear

CEO salary ( 15% of 75000 executive Vp cost)	$ 11250
Traveling cost 10% of 137000	$13700
Occupancy is related to corporate head quarter space	$84000
Overhead related to corporate overhead	$40000
Total Operating cost	$148950

If company outsource the marketing research function its saving $208000 in cost , but certain fixed operating expenses company have to still bear whether it accept the order or not which result in $148950

So relevant cost saving if company outsource = $208000- $148950

=$59050

If CEO outsource the department to global firm he can save in company cost by $59050 , in comparison to if Gizmo INc operates by itself .

So CEO should outsource the department .