You are the business analyst for the TGH Organization and are determining if you should buy or build a solution for your company. You have determined that you can create the in-house solution for $78,000 with a monthly support cost of $8,765. A vendor can create the solution for $61,000 with a monthly support costs of
$7,990.
How long will it take your company to break even if you choose the internal solution versus the vendor's solution?
To determine the break-even point, we need to consider the initial setup costs and the monthly support costs for both solutions. The in-house solution costs $78,000 initially and $8,765 per month to support, while the vendor's solution costs $61,000 initially and $7,990 per month to support. The additional initial cost for the in-house solution is $78,000 - $61,000 = $17,000. The additional monthly support cost for the in-house solution is $8,765 - $7,990 = $775. To find the break-even point, we need to divide the extra initial cost by the extra monthly cost: $17,000 / $775 ≈ 21.935, which rounds to approximately 22 months.
need to find the common variable used in make or buy which is here number of months. Alt (make) the Break point = 61000 + 7990 * N where N number of months Alt (buy) the Break point = 78000 + 8765 * N where N number of months at break point value the two alternarives are equal 61000 + 7990 * N = 78000 + 8765 * N N=21.935
by solving this equation, we will get a negative value of N, the question is incorrect.
there is an error in the numbers: the cost (or support) should be switched to break even at 22 months. Otherwise, they would never ever break even: the first solution is more expensive both in cost and support.
Monthly extra cost for in-house solution=$8765-$7990=$775 Extra cost expended in a year for in-house solution against vendor solution=$78000-$61000=$17000 How many months would it take to cover extra yearly cost at $775 monthly=$17000/$775=21.935 or 22months
The logic used for the solution does not make any sense.
I would like to find out the formula that got us 22 month
The internal solution will never break even because its costs will always be higher than the vendor's cost. The vendor's cost are always beneficial as its fixed as well as variable costs are lower compared to internal solution's cost. As the time passes, the internal solution tends to cost more compared to internal solution. This is also justified by negative N value resulted from solving the equation: $78,000 + $8,765*N = $61,000 + $7,990*N
It is true that the values for the monthly costs are reversed. Like this, the number of months would be negative since the two functions would never meet, as Olivier said
Buy: $86765 Make: $68990 Implementation cost difference: $17775 Monthly cost difference: $775 Implementation cost difference: $17775/Monthly cost difference: $775 =22.93 months to break even. Nearest answer D
out of scope of BABOK v3
makavely007 answer is correct, only if we reverse the monthly cost. Without that, there is no chance that second solution will break first one
This is a tricky question. I think the way it is written throws me off, but ultimately I see that the "break even" is referring to how much time will it take to offset the extra expenses that would have been saved up front. E.g., if the company had chosen the vendor's solution, they would have immediately realized and equivalent of 22 months of savings vs. the internal solution.
me too