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 cost of
$7,990.
How long will it take your company to break even if you choose the internal solution versus the vendor's solution?
Correct Answer: D
Explanation
To calculate the break-even point, we need to compare the total costs of the internal solution and the vendor's solution over time. The internal solution has a higher initial cost ($78,000) and a higher monthly cost ($8,765) than the vendor's solution ($61,000 and $7,990 respectively). Therefore, the internal solution will take longer to break even with the vendor's solution. The formula for the break-even point is:
Break-even point = (Initial cost difference) / (Monthly cost difference) Plugging in the numbers, we get:
Break-even point = ($78,000 - $61,000) / ($8,765 - $7,990) Break-even point = $17,000 / $775 Break-even point = 21.94 months Rounding up to the nearest whole month, we get 22 months as the break-even point. References: This question is based on the concept of financial feasibility analysis, which is part of the business analysis planning and monitoring knowledge area in the BABOK Guide. Financial feasibility analysis is the process of comparing the costs and benefits of different solutions to determine the optimal one for the organization.
One of the techniques for financial feasibility analysis is break-even analysis, which calculates the point in time when the costs of a solution equal the benefits of the solution. You can find more information about financial feasibility analysis and break-even analysis in the following sources:
BABOK Guide, section 3.4.5.5, pages 76-77
CBAP / CCBA Certified Business Analysis Study Guide, chapter 3, pages 85-86 Certified Business Analysis Professional (CBAP) | Coursera, course 2, week 3, video 3.3