Cost Benefit Analysis and Short Term Decision Making - Noyon Lanka Pvt Ltd

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model that could be used in decision making, the accuracy of a cost-benefit analysis may be limited. Hence meticulousness of recognizing probable costs and benefits is critical. In a situation where a business fails to recognize actual potential costs and benefits, the decision made can lead to poor results and may even have adverse effect to the business.

DECISION MAKING SITUATION

“MAS Fabrics & Manthric Design Studio”

As described in company profile, Noyon Lanka (Pvt) Ltd belongs to the Fabrics Cluster of MAS Holdings which was formed with an intention The Fabrics cluster was formed as an initiative to deliver a holistic supply chain solution from design to manufacture to its global clientele allowing for vertical integration in the Sri Lankan apparel industry. The Fabrics Cluster (MAS Fabrics) is a strategic and unifying component of MAS Holdings that facilitate innovation throughout the value chain in ground breaking new developments in fabric, accessories & components such as lace and elastics via highly specialized facilities and through the industry leading joint venture partners.

(Fabrics, 2015)

In light of the notion of unifying element, Noyon Lanka made an investment of LKR 25 million and constructed the “Manthric Design Studio” in 2014. LKR 25 Million include construction cost of the building, landscaping cost, interior decoration cost and the cost of, furniture and other fittings. Completion of construction work and opening of the studio was held in November 2014. The Design studio comprises a star class bedroom, Lounge, a Dining room and a large area for Creative designing work. The purpose of constructing “Manthric” is a collaborative effort of the MAS Fabrics cluster to combining different garment manufacturing units and showcasing a complete product to the end customer. The futuristic status of the “Manthric” Design studio would be a multi-disciplinary ’creative nerve center’ where customers can accommodate full time to conduct their innovative fashion designing work in collaboration with Noyon Lanka designers, develop product according to the design created, use raw material offered by individual Strategic Business Unit in the cluster and get their sample manufactured in house. It is a synergistic initiative to execute ’Concept to Carton’ vertical integration, under one roof. Noyon Lanka’s great expectation is to make “Manthric” unique, and has taken an immense effort to include luxuriousness of a five star hotel as well as to set up an ambiance of relaxation to boost creative thinking of the designers who carry out their creative work in the studio. In addition to being used by resident client designers, the studio is also used by all Strategic Business Units in the cluster to host their customer visits in the Board room and the Lounge. Meals & refreshments for all visits including the resident visitors are provided by Noyon Lanka canteen.

The Finance Director of Noyon Lanka believes the operating cost of “Manthric” Desing studio is too high therefore proposes that the service operation of “Manthric” needs to be out sourced to an external party. One of the five star hotels in Colombo, Sri Lanka has offered to manage services of “Manthric” Studio at a fixed rate of Rs.275,000 per month.

Expenses incurred monthly for management of the studio is as follows:

Housekeeping Labour Rs. 30,000 (3 employees)

Steward & Assistant (F&B)Salary Rs. 35,000

Cost for Lunch (Rs1,500/- Per Plate) Rs.225,000

(Average number of participants per visit -15/ Average number of visits for a month -10)

Cost for Refreshments (Breakfast/ Snacks) Rs.10,000

Fixed cost Rs. 2,500

(Air fresheners/ Toiletries/Laundry etc)

Utility (Water/Electricity) Rs.56,000

Maintaining Landscape Rs.20.000

If Noyon Lanka accepts the offer from The Five star hotel, Housekeeping Labourers / Steward and his assistant will be redundant. Food, Housekeeping, F & B, and the fixed expenses for Air freshener, Toiletries, Laundry etc. are covered in the rate offered. Company has already incurred a sunk cost of 75,000 for training the Steward and his Assistant at Ceylon Hotel School. Another Rs.150,000 spent on purchasing cutlery & crockery. Hotel will make use of theses cutlery and crockery for food serving if needed.

The office Manager who is also in charge of “Manthric” is requested by the management to carry out a cost benefit analysis to identify the feasibility of outsourcing the entire service operation.

APPLICATION OF THE DECISION MAKING MODEL

Since the situation is short term decision making, an incremental cost analysis – Make or buy could be used to identify the viability of out sourcing the services.

Incremental cost benefit analysis

Incremental benefit / cost saving by

Out sourcing Rs Rs

Housekeeping Labour 30,000

Steward & Assistant (F&B)Salary 35,000

Cost for Lunch 225,000

Cost for Refreshments (Breakfast/ Snacks) 10,000

Fixed cost 2,500 302,500

Incremental Cost by out sourcing (275,000) (275,000)

Net incremental benefit by outsourcing 27,500

BUSINESS VALUE/ COST SAVING

Based on the figures of the Incremental cost benefit analysis, it is viable to outsource the operation of “Manthric” to the Five Star Hotel than it is maintained by Noyon Lanka.

Since the company strives providing a feeling of a star class hotel to the visitors who accommodate in the studio, it is further sensible to outsource as the Hotel will use their expertise in the areas of hospitality management, taste of food, Housekeeping etc.

Majority of the designers who visit “Manthric” are from those high end companies who market exclusive fashion brands in Europe and USA. Therefore, it would