Measuring relevant costs and revenues for decision-making (Management and cost accounting)

Theo and Leoni decide to focus on Baguette and mores core competencies and outsource all of their IT needs. The current, in-house IT department is performing reasonably well in an operational sense, but not really delivering its potential for the business and projects were tending to overrun budgets. Therefore, they get in touch which the leading IT company ITCO.

The proposal from ITCO is a three-year initial contract at a fixed price of 250,000 per year. The initial response of the in-house IT department to the possibility of outsourcing was negative. They expressed concern over the recent large investment the company had made in replacing all computer systems, 100,000 had been spent only last year, and they expected this equipment would serve the company for another three years. Obviously, there was a deep concern over job security. Currently, the IT department has ten staff earning, on average, 30,000 per year. ITCO had agreed to take on eight of these staff maintaining the terms and conditions they held with GB. Of the remaining two staff one, Charles, was eager to take early retirement and the other was to be retained within GB, at a salary of 30,000 to assist with the management of the contract. A contract manager would have to be appointed by GB this would be a new appointment, the company did not currently have anyone with those skills in-house at an estimated salary of 50,000.

Additional information provided by the finance director:

- If Charles retired two years early the company would have to pay an extra 20,000 lump sum into the pension scheme - The building housing the IT department was on a three-year lease and the company was committed to an annual rental of 10,000 per year for that period. This building could be sublet if IT were outsourced generating 4,000 in the first year, 8,000 in the second, and 10,000 in the final year of the lease. - Current forecasts for consumables in the IT department are 5000, 6000 and 7000 over the next three years. - The resale value of the IT equipment bought last year is 30,000. - Annual overheads for the IT department are 27,000 per year. 60% of the overhead varies with staff numbers. The remaining 40% is a share of central overhead charges. Theo and Leoni wonder whether they should accept or reject the outsourcing proposal and whether they should take into account any other factors before a decision is made.

Answer the following questions:

Should Theo and Leoni accept or reject the outsourcing decision? Which other factors should they take into account before a decision is made?