Total Cost Last Year = FC + VC(Q) = 85,000 + 15(1450) = $106,750 — Henri French Cuisine HFC chain restaurants trying decide makes sense outsource the

Henri of Henri’s French Cuisine (HFC), a chain of 12 restaurants, is trying to decide if it makes sense to outsource the purchasing function. Currently, Henri employs two buyers at an annual fixed cost of $85,000. Henri estimates that the variable cost of each purchase order placed is $15. Value-Buy (VB), a group of purchasing specialists, will perform the purchasing function for a fixed annual fee of $100,000 plus $5 for each purchase order placed. Last year, HFC placed 1450 purchase orders.

(a) What was the cost last year to HFC when doing the purchasing in-house?

(b) What would the cost have been last year had HFC used Value-Buy?

(c) What is the indifference point for the two alternatives?

(d) If HFC estimates it will place 1600 purchase orders next year, should it use VB?

(e) What additional factors should be considered by HFC?

SOLUTION