Study the case study below and answer questions that follow:   Custom Graphic Works has been operating for just over a year, and sales are exceeding targets. Currently, two designers are working?

Study the case study below and answer questions that follow:

 

Custom Graphic Works has been operating for just over a year, and sales are exceeding targets. Currently, two designers are working full-time, and the owner is considering increasing capacity to meet demand. (This would involve leasing more space and hiring two new designers.)

He decides to complete a Cost-Benefit Analysis to explore his choices.

 

Assumptions

Currently, the owner of the company has more work than he can cope with, and he is outsourcing to other design firms at a cost of R50 an hour. The company outsources an average of 100 hours of work each month.

He estimates that revenue will increase by 50 percent with increased capacity.

Per-person production will increase by 10 percent with more working space.

The analysis horizon is one year: that is, he expects benefits to accrue within the year.

 

Costs

Cost in First Year

Lease

750 square feet available next door at R18 per square foot

R13,500

Leasehold improvements

Knock out walls and reconfigure office space

R15,000

Hire two more designers

Salary, including benefits

R75,000

 

Recruitment costs

R11,250

 

Orientation and training

R3,000

Two additional workstations

Furniture and hardware

R6,000

 

Software licenses

R1,000

Construction downtime

Two weeks at approximately R7,500 revenue per week

R15,000

Total

R139,750


Benefits

Benefit Within 12 Months

50 percent revenue increase

R195,000

Paying in-house designers R15 an hour, versus R50 an hour outsourcing (100 hours per month, on average: savings equals R3,500 a month)

R42,000

10 percent improved productivity per designer (R7,500 + R3,750 = R11,250 revenue per week with a 10 percent increase = R1,125/week)

R58,500

Improved customer service and retention as a result of 100 percent in-house design

R10,000

Total

R305,500

 

He calculates the payback time as shown below:

R139,750 / R305,500 = 0.46 of a year, or approximately 5.5 months.

 

From the above cost benefit analysis, which solution is best for the business i.e either to increase capacity and get more space & designers or to do nothing and keep the current arrangement? Give reasons to support your answer?