Mid-Valley Industrial Extension Service, a state-sponsored agency, provides water quality sampling
services to all business and industrial firms in a 10-county region. Last month, the service purchased
all necessary lab equipment for full in-house testing and analysis. Now, an outsourcing company
has offered to take over this function on a per-sample basis. Data and quotes for the two options
have been collected. The MARR for government projects is 5% per year and a study period of 8
years is chosen.
In-house: Equipment and supplies initially cost $125,000 for a life of 8 years, an AOC of $15,000,
and annual salaries of $175,000. Sample costs average $25. There is no significant salvage value
for the equipment and supplies currently owned.
Outsourced: Cost averages $100 per sample for the first 5 years, increasing to $125 per sample for
years 6 through 8.
Determine the breakeven number of tests between the two options. Determine the breakeven point
spreadsheet functions necessary to perform the analysis.
The service director has asked the outsource company to reduce the per sample costs by 25% across
the board over the 8 years. Will this increase or decrease the breakeven point? (Hint: Prior to
answering, look carefully at your graph before cost reduction).