1. 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 deci

1. 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.