Westin Co. has handled all of its human resource (HR) activities in-house for its entire existence. Its HR professionals have done a fantastic job of finding good talent in operations, IT, inventory, and sales. Lately, though, with the job market being strong in all these functional areas, the HR staff has been struggling to find and keep good employees. After some research, executives have found two other options for human resource services, as follows.

Costs/Savings (per year)			Keep Existing HR Staff	Outsource A	Outsource B
Salaries and benefits for 2 employees			$100,000
Other direct fixed costs related to 2 employees			$10,000.00
Contract to outsource				$75,000	$100,000
Estimated savings from employee engagement activities				10000	20000

Westin could realistically let go of two of its three HR staff members if it outsourced the majority of the HR work. Even in that situation, though, it would like to retain one full-time HR employee to work on productivity and employee retention/engagement activities to boost the bottom line.

Here are some additional qualitative considerations:

Outsource A. A fairly reputable company, located within 30 miles of Westin; in operation for 10 years; industries served include healthcare, education, and professional services. May require a bit more hand-holding from remaining HR professional than the other provider would require.

Outsource B. Highly reputable company; located within 30 miles of Westin; in operation for 35 years; industries serviced include healthcare, professional services, manufacturing, utility, food service, and nonprofits. Looks to be fairly self-sufficient, with only minimal contact needed with remaining HR professional.

Required

Which of the three options appears to be the most cost-effective solution for Westin’s HR activities?

Which option do you think Westin is most likely to select, and why?

Westin currently generates contribution margin of $3 per unit. If Westin’s vendors are able to implement HR-initiated productivity changes to the following degree (in addition to the engagement effects noted above), which option is Westin most likely to select, and why?

Outsource A: increase volume by 2,000 units; no immediate variable cost savings

Outsource B: increase volume by 10,000 units; save $0.50 per unit on variable costs for these new units

Would your answer to part (c) change if Westin was confident that its contract with Outsource A would turn into a smooth relationship, thus providing the remaining HR employee more time to work on employee efficiency and engagement activities? How much more savings would Westin need to find in order for Outsource A to be its preferred option?