Question

Engulf and Devour Bank operated a call services center for its credit card operations. The bank receives approximately 1,000,000 calls a year. The bank pays call center salaries of $500,000 a year and leases call center space for $300,000 per year. The bank just completed a new training program for call center operators that cost $85,000. The bank was approached by a vendor who offered to “take over” call center services at a charge of $0.85 per call. If the call center is outsourced the bank can immediately eliminate the call center labor and terminate the lease for the call center space. a. What are the total costs avoided if the call center is outsourced? $ b. What are the total incremental costs incurred if the call center is outsourced? $ c. Based upon the quantitative facts presented, the bank (should, should not) outsource the call service center

Answer 1

(a)- Costs that will be avoided

Call Center Salaries = $500,000
Lease for Call Center Space = $300,000
Call Center operators training = Sunk Cost as already incurred and hence irrelevant

Total Costs that will be avoided = $800,000

(b)- Incremental Costs if outsourced

Incremental Costs = 1,000,000 calls * $0.85 per call = $850,000

(c)- Cost Benefit Analysis

Incremental Costs = $850,000
Incremental Benefits = $800,000 (Costs that will be avoided)
Net Benefit/(loss) = $50,000 (loss)

Since there is net loss, the bank should not outsource the call service center