Chapter 8, Problem 8.12SE

Relevant information for outsourcing delivery function (Learning Objectives 1 & 6)

Myer Food in Bowling Green, Kentucky, manufactures and markets snack foods. Mila Giles manages the company’s fleet of 220 delivery trucks. Giles has been charged with “reengineering” the fleet-management function. She has an important decision to make.

• Should she continue to manage the fleet in-house with the five employees reporting to her? To do so, she will have to acquire new fleet-management software to streamline Myer Food’s fleet-management process.
• Should she outsource the fleet-management function to Fleet Management Services, a company that specializes in managing fleets of trucks for other companies? Fleet Management Services would take over the maintenance, repair, and scheduling of Myer Food’s fleet (but Myer Food would retain ownership). This alternative would require Giles to lay off her five employees. However, her own job would be secure, as she would be Myer Food’s liaison with Fleet Management Services.

Assume that Giles’ records show the following data concerning Myer Food’s fleet:

Book value of Myer Food’s trucks, with an estimated five-year life	$ 3,800,000
Annual leasing fee for new fleet-management software	$ 9,000
Annual maintenance of trucks	$ 166,000
Fleet Supervisor Giles’ annual salary	$ 65,000
Total annual salaries of Myer Food’s five other fleet-management employees	$ 160,000

Suppose that Fleet Management Services offers to manage Myer Food’s fleet for an annual fee of $280,000.

Which alternative will maximize Myer Food’s short-term operating income?