Question

At the BlueFin Bank corporate​ headquarters, management was discussing the potential of outsourcing the processing of credit card transactions to​ DataEase, an international provider of banking operational services. Processing of the transactions at BlueFin has been a costly element of the annual profit and loss statement and the continual investment in equipment to keep up to date has been draining capital reserves.

Based upon initial study and​ negotiations, DataEase will charge ​$0.05 more per transaction than​ BlueFin's cost per​ transaction, and DataEase will want ​$8 million per year to cover equipment and overhead costs associated with the contract. BlueFin has yet to develop an estimate for the annual overhead and fixed costs associated with processing the transactions. These costs include​ supervision, administrative​ support, maintenance, equipment​ depreciation, and overhead.

If BlueFin must process 20 million transactions per​ year, how high must those fixed costs be before it would pay to use​ DataEase?

The fixed costs must be higher than ​$____​(Enter your response as an​ integer.)

Answer 1

We do not know the amount if fixed cost incurred by Bluefin.

However, we know the additional costs (additional than the current variable cost) that will be incurred to Bluefin if outsourced.

Additional cost = ($0.05 x 20 million transactions) + $8 million fixed cost = $9 million

Bluefin will choose to outsource only if the current fixed expenses are beyond the additional cost on outsourcing. Unless and until the fixed expense is lower than this additional cost, it is profitable not to outsource.

Therefore, the fixed costs must be higher than ​$9 million.