Question

A leading firm requires software for its internal use. The firm wants to evaluate whether it is less costly to have its own programming staff and resources or to have programs developed by an external development firm. The cost of both options are a function of the number of lines of code. After the mathematical analysis it has been estimated that the in-house development will cost $1.75 per line of code. In addition, annual overhead costs for supporting the program will be $35000. While Software developed outside the firm costs, on average, $2.5 per line of code.

How many lines of codes per year make costs of the two options equal?

If programming needs are estimated at 35000 lines per year, what are the costs of the two options?

In part b what would be the in-house cost per line of code have to equal for the two options to be equally costly? ​

Answer 1

Answer:

Part A

A leading firm requires a software for its internal use. The firm wants to evaluate whether it is less costly to have its own programming staff and resources or to have programs developed by an external development firm. The cost of both options are a function of the number of lines of code. After the mathematical analysis it has been estimated that the in-house development will cost $1.75 per line of code. In addition, annual overhead costs for supporting the program will be $35000. While Software developed outside the firm costs, on average, $2.5 per line of code.

a) How many lines of codes per year make costs of the two options equal?

b) If programming needs are estimated at 35000 lines per year, what are the costs of the two options?

c) In part b what would be the in-house cost per line of code have to equal for the two options to be equally costly?

Part B

Because the parameters used in mathematical models are frequently estimates, actual results may differ from those projected by the aforementioned mathematical analysis. To account for some of the uncertainities which may exist in a problem, analysts often conduct sensitivity analysis. The objective is to assess how much a solution might change if there are changes in model parameters. Assume in part A that the software development costs by outside firms might actually fluctuate by ±15%.

Compute the breakeven points if the costs are 15 percent higher or lower and compare your results with the mathematical model achieved prior to the sensitivity analysis.