Endius Inc.

Case Study #3

Managerial Accounting

November 6th, 2017

1. Davison realizes that in order to proceed with product

development, he may have to personally loan funds to either

 Endius’ in-house team or to Product Genesis to cover the initial

development costs. Pursuing Product Genesis’ service will cost

Endius roughly $287,831(but Product Genesis recommends

allowing for a total budget of $300,000 for the proposed time

and material program). If Endius develops the steerable forceps

in-house, the cost will still be higher than outsourcing whether it

takes 8, 10 or 14 months to develop. See exhibits B, C, D and E

on pages 5-7.
2. There are three major factors that Davison considers when

evaluate the alternatives: the amount of time required to

complete product development, accessibility to technical

expertise, and the cost of each alternative. Please see exhibit F

on page 8 for more details on each alternative’s strengths and

weaknesses.
3. If I was Tom Davison, I would outsource the product and accept

Product Genesis’ proposal. For a startup, it is very risky, time

consuming and exasperating to focus on one product. There is

great urgency to make it to market before competitors do or

before funding runs out. As seen via the strengths and weakness’

as well as the financial breakdowns for each month, it would be

best to outsource. Although developing in-house would establish

internal competencies and construct an initial product

development facility, it is a safer financial choice to outsource.

It’s also better to outsource because the level of work is

2
 consistent and has stronger deadlines (a company like Product

Genesis cannot guarantee exact dates and budgets, but

generally have a good track record and reputation for

accomplishing product development goals on time and close to

the originally proposed budget). Considering time is an important

factor, outsourcing to Product Genesis has provided a breakdown

of total hours needed to complete the product. Since Davison

needs to recruit new engineers and other highly competent

personnel (which he is unable to find a guaranteed timeline on

how that would happen, especially considering they currently

lack the ability to pay employees and most staff are unwilling to

work without a paycheck), it can take anywhere from an

estimated 8-14 months (which will incur higher expenses as time

goes on). Even if Endius was ambitious and strived to expedite

the process, 8 months of work has an estimated cost of

$336,167. This is nearly 17% ($48,336) more costly than Product

Genesis’ proposal of $287,831.

4. Vogel’s confidence in Tom Davison is essential. Their history has

led Product Genesis to request a deposit that is typical to an

established company, not a startup. Funding product

development without closing on the initial round of financing is

very difficult, yet Product Genesis offered to begin working

before Davison completed his loan arrangements due to their

trusting relationship. Vogel even states the main question for

3
working with a startup is “How do we feel about the executive in

charge?” Their confidence in Davison means they’ll begin

product development quickly, without worrying about his ability

to pay for the initial deposit (and are asking for a smaller

discount). Without this pre-established relationship, it would be

much harder to outsource development(which means there’d be

higher costs to develop in-house). When timing, cost, and

expertise are paramount to the success of a startup’s initial

product development, this relationship is crucial and Product

Genesis overall surpasses Endius’ ability to develop the product

in-house. That being said, would still be more cost effective to

pursue outsourcing even without the existing relationship, and

Davison should outsource regardless.

4
Exhibit A: Estimated costs for Product Genesis’ proposal:

Item Total
Estimated Service Charges $263,705
Senior Staff Liaison $12,626
Expenditures $11,500
Total Estimated Budget $287,831

This information is seen in Exhibit 4 on pg 9 of Endius Inc: Alternatives for Developing a New Medical Device

Exhibit B: Essential Equations to Calculate Salaries, Rent, and Specialty Expertise

Equations of Salaries, Rent and Average Cost of Specialized Expertise

Salaries:

The senior engineering salary is given by diving the annual salary by 12, then
multiplying it by n where A is the annual salary and n is the number of months.

(A/12)(n)
(100,000/12)(n)

The engineering tech salary is given by diving the annual salary by 12, then
multiplying it by n where A is the annual salary n is the number of months.

(A/12) (n)

5
 (75,000/12)(n)
Rent:

The total rent is given by (4,000)(n), where n is the number of months.

(4,000)(n)

Cost of Specialized Expertise:

The avg. cost of specialized expertise can be found by combining the third engineer’s
compensation and equipment cost, then dividing by 2.

(Third Engineer Compensation + Equipment Cost)/2

(75,000+50,000)/2

Exhibit C: In-House Development – 8 Months

Item Total
Salaries(with benefits):
$66,667.0
Senior Engineer 0
$50,000.0
Engineering Technician 0
$75,000.0
Third Engineer 0
$191,667.00
Rent: $32,000.00
Equipment Cost $50,000.00
Specialized Expertise $62,500.00
Total Cost: $336,167.00

Senior Engineering = (8,333.33)(8)

Engineering Technician = (6,250)(8)
Rent= (4,000)(8)
Specialized expertise= (125,000/2)

Exhibit D: In-House Development – 10 Months

6
 Item Total
Salaries(with benefits):
Senior Engineer $83,333.00
Engineering Technician $62,500.00
Third Engineer $75,000.00
$220,833.00
Rent: $40,000.00
Equipment Cost $50,000.00
Specialized Expertise $62,500.00
Total Cost: $373,333.00
Senior Engineering = (8,333.33)(10)
Engineering Technician = (6,250)(10)
Rent= (4,000)(10)
Specialized expertise= (125,000/2)

Exhibit E: In-House Development – 14 Months

Item Total
Salaries(with benefits):
$116,667.0
Senior Engineer 0
Engineering Technician $87,500.00
Third Engineer $75,000.00
$279,167.00
Rent: $56,000.00
Equipment Cost $50,000.00
Specialized Expertise $62,500.00
Total Cost: $447,667.00
Senior Engineering =
(8,333.33)(14)
Engineering Technician = (6,250)(14)
Rent= (4,000)(14)
Specialized expertise= (125,000/2)

7
Exhibit F: Strengths And Weakness’ of Each Alternative

Timing
In-House Davison was unable to estimate the necessary time needed to complete
Development development due to not having the necessary additional staff hired yet.
He also did not know if they’d be able to meet their deadlines.
Outsourcing to Product development consultancies typically provided a schedule, and
development reputable consultancies such as Product Genesis were known for
consultancy achieving schedules that they promised (seen in Exhibit 3, via total
estimated hours). However, sometimes consultancies can have
resource/time constraints due to conflicting client demands, so these
estimated hours aren’t always accurate.

Range of Expertise
In-House If Endius developed the product in-house, their current few employees
Development would not have all the skills needed, thus Endius would have to hire two
or three engineers. Endius would then also hire outside consultants and
subcontractors that had even greater expertise needed for their complex
product(but Endius could cut costs by only contracting with outside
personnel for a few days or weeks).
Outsourcing to Contracting with a consultancy allows access to a pre-existing team
development with a wide range of skills. Due to their specialty skills, per-hour labor

8
consultancy rates can be high.

Cost
In-House Using in-house staff, the hourly rate would be less than that of a
Development consultancy (as the per hour rates aren’t as “loaded” as that of a
consultancy). However, Endius’ staff will not always be fully engaged
but will still be paid. Endius would also have to pay for any additional
outside consultants that they’d hire, especially because they lacked
specialized expertise for certain tasks such as prototype fabrication.
Endius would also take more time (which incurs additional monthly rent
costs). Despite this, in-house development means that Endius would
acquire internal competencies, and new product development facilities
(which is beneficial in the long run).
Outsourcing to A consultancy could provide a time-and-materials quote. Hourly rates
development would be high for design and engineering personnel. The quote isn’t
consultancy completely certain, as project parameters will likely change during
development. Despite this, the company’s good track record is
reassuring that actual costs would be close to the cost quoted.

9
10