Solved Problems

(See student companion site for Excel template.)

• Problem 1

Jack Smith, owner of Jack's Auto Sales, is deciding whether his company should process its own auto loan applications or outsource the process to Loans Etc. If Jack processes the auto loan applications internally, he faces an annual fixed cost of $2500 for membership fees, allowing him access to the Top-Notch credit company, and a variable cost of $25 each time he processes a loan application. Loans Etc. will process the loans for $35 per application, but Jack must lease equipment from Loans Etc. at a fixed annual cost of $1000. Jack estimates processing 125 loan applications per year. What do you think Jack should do?

  • (a) Should Jack process the loans internally or outsource the loans if demand is expected to be 125 loan applications?
  • (b) Is Jack indifferent to internal processing and outsourcing at one level of loan applications?

Before You Begin

To make his decision when demand is known, Jack needs to calculate the total cost of processing the auto loans in-house and compare it to the total cost of outsourcing the loan processing. You need to identify the relevant costs. If Jack processes the loans internally, he has an annual fixed cost of $2500 plus a per loan variable cost of $25. If the loan processing is outsourced, Jack has a fixed annual cost of $1000 and a per loan variable cost of $35.

Solution

  • (a) The total cost for processing 125 loan applications internally is $5625. That is $2500 ...

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