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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 $260,000 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 $338,000:

Salary and fringes:
Senior researcher $71,000
Staff researcher 50,000
Clerical staff 72,000
VP Marketing(1) 56,000
Occupancy(2) 25,000
Subscriptions and travel (3) 64,000

(1) Represents 20% of cost of the VP, who is estimated to spend 20% of his time on marketing research issues.
(2) Occupancy costs are $25/sq ft: depreciation, $11; utilities, $10; maintenance, $4.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.

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.

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This solution shows calculations of cost differential of outsourcing versus retaining the function and discusses the factors that XYZ management should consider in making this decision.

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a. Determine the cost differential to XYZ of outsourcing versus retaining this function.

Area Occupied by Marketing Research department = Occupancy cost / Occupancy cost per Sq. ft.=$25000 /$25 =1000 sq.ft

Avoidable utility cost = $10*70% =$7 per square feet

Unavoidable occupancy cost = Occupancy cost -avoidable occupancy cost =$25-$7 ...

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