Case Study

In house Vs Outsourcing
Computea Ltd. is an IT based company in Delhi. It is into outsourcing IT consulting and systems
integration. Setup as a startup company three years ago by five entrepreneurs, the headcount
of the company is presently 100, with an annual turnover of Rs. 80 lakh. As an employee
friendly organisation and to ensure good working environment, the company arranges
tea/coffee to each to each of its employee thrice a day. About half of the employees prefer tea
and remaining prefer coffee.

Tea and coffee are presently supplied by a vendor who is paid on a monthly basis. The cost of a
cup of tea is Rs. 3 and that of a coffee is Rs. 5. Labour charges amount to Rs. 500 per month.

The HR manager, K.V Prasad has proposed to the CEO Vineet Barnwal to install a coffee/tea
vending machine in the premises of Computea Ltd. A vending machine is available from Good
Serve Ltd. for Rs 2,00,000 having a useful life of five years with no salvage value. The machine
would require annual maintenance cost of Rs. 30,000 in addition to spare parts amounting to
Rs. 10,000. The other associated operating costs would be estimated as below:

 2 packets of coffee beans per day at Rs. 30 per packet

 2 packets of 1 kg tea powder per day at Rs. 20 per packet
 7,500 plastic cups per month at Re 0.25 per cup
 200 litres of milk per month ( A litre of milk costs Rs. 14)
 60 kgs of sugar per month (The price of sugar is Rs. 15 per kg)
 Labour charges would amount to Rs. 1,500 per month
 Electricity charges Rs. 500 per month

The number of working days in a month is 23. Computea Ltd. would use straight line method of
depreciation and its cost of capital is 10 per cent. Tax rate is 35 percent. As a financial
consultant, would you advise the CEO of Computea Ltd. to install the vending machine? Why?