Outsourcing Costs

Dave Flatch, CEO of Flatch’es Latches Hardware Distributors, is trying to decide if it makes sense to outsource their warehouse order picking activity. Currently, Dave employs four order pickers each with an annual salary of $27,000. In addition, Chris estimates the cost per order picked is around $4 each (for packing supplies and other incremental expenses). Pickers Unlimited claims that they will pick orders for a fixed (one time) fee of $175,000 and will charge only $2.50 per order picked. Last year, a total of 6,000 orders were picked in Dave’s warehouse.

Answer the following four questions (a through d) and show your answer and your work in the space below the question.

a. What was the total cost Flatch experienced last year due to the order picking function?

b. What would the cost have been if Flatch’es Latches would have used Pickers Unlimited last year?

c. What is the indifference quantity between the two alternatives?

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a. What was the total cost Flatch experienced last year due to the order picking function?

Total cost = 4*$27,000 + 6,000*$4 = $108,000 + $24,000 = $132,000...