Question :

Bell Video Inc. (BVI) is going to be outsourcing its information technology department (IT). If BVI outsources IT, the cost per month could be $175,000. The present total cost of IT is $250,000 per month. Of this cost, $150,000 shows salaries and benefits of employees that could be terminated if IT is outsourced. The remaining $100,000 consists of IT's share of corporate overhead that is related to IT. It is expected that only 20 percent of the corporate overhead would be eliminated if IT is outsourced. Moreover, the space which IT presently occupies could be used by the purchasing department. Presently, the purchasing department rents an office off-site for $10,000 per month. Finally, the IT department has spent $10,000 each of the last two months researching a new procurement software package. If IT is outsourced, this money spent can provide no future economic benefit.

1. Should BVI outsource IT? Justify your answer with numerical support.

2. If none of the corporate overhead would be eliminated as a result of outsourcing IT, could your answer change? Why? What type of cost is corporate overhead in this case?

3. Which of the costs would be explained as an opportunity cost? Which is a sunk cost?