- XYZ Corporation operates a Marketing Research department. This department compiles information from published sources, and from its own consumer studies, to assist marketing personnel in forecasting product demand and making pricing and promotion decisions. A large marketing research firm has bid $280,000 per year for a three-year contract to perform the same services. For the most recent year, XYZ s controller determined the cost of operating the Marketing Research department to be $346,000:
Salary and fringes:
Senior researcher $68,000
Staff researcher 48,000
Clerical staff 70,000
VP Marketing (1) 62,000
Occupancy (2) 31,000
Subscriptions and travel (3) 67,000
(1) Represents 30% of cost of the VP, who is estimated to spend 30% of his time
on marketing research issues
(2) Occupancy costs are $31/sq ft: depreciation, $14; utilities, $11; maintenance, $6.
Utilities are 70% variable; maintenance is an allocation of fixed costs. There are no plans for alternate use of the space.
(3) Subscriptions and travel costs would be borne by outside research firm.
Required:
a. Determine the cost differential to XYZ of outsourcing versus retaining this function.
b. Discuss the factors that XYZ management should consider in making this decision.