In the past year, a company paid US$60,000 to an external subcontractor for an ongoing project. The project manager has been asked to evaluate if the project can be delivered more cost effectively this year by using internal labor. The project manager used an optimistic term of 4 months, a pessimistic term of 6 months, and a most expected term of 5 months, and has concluded that the service can be delivered with the following resources: Two engineers (monthly salary of US$700 each), One project manager (monthly salary of US$1,600), Additional estimated monthly expenses of US$2,000. The project manager used the program evaluation and review technique (PERT) to calculate the savings if the project is delivered with in-house resources.How much money will the project manager estimate the company can save?

Rationale

US$30,000

To calculate the savings from using internal labor instead of an external subcontractor, the project manager estimated the total cost of the project using PERT and compared it to the US$60,000 already paid. The internal cost, after calculations, amounted to US$30,000, indicating a potential saving of US$30,000.

A (US$35,000) YOUR ANSWER

This option incorrectly suggests that the savings amount to US$35,000. Given that the external cost is US$60,000, the internal cost must be lower than this amount, but calculating the internal expenses shows a total of US$30,000 in costs, leading to a saving of US$30,000 rather than US$35,000.

B (US$40,000) YOUR ANSWER

This choice implies that the project manager would estimate savings of US$40,000. However, the internal labor cost totaling US$30,000 suggests that savings must be calculated as US$60,000 - US$30,000, which results in a saving of US$30,000, not US$40,000.

C (US$20,000) YOUR ANSWER

Choosing US$20,000 as the savings amount is incorrect. When the internal costs are calculated accurately, they amount to US$30,000, which gives a savings of US$30,000, clearly exceeding US$20,000.

D (US$30,000) CORRECT

This is the correct estimation of savings. The project manager determined that by utilizing internal resources, the project would cost US$30,000, allowing the company to save US$30,000 compared to the US$60,000 paid to the subcontractor.

Conclusion

The project manager's evaluation using PERT revealed that shifting to internal labor would save the company US$30,000, calculated from the difference between the external subcontractor cost and the internal labor costs. This analysis illustrates the importance of cost evaluation in project management, enabling informed decisions that can significantly benefit company finances.

US$30,000

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