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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?
