Express Delivery Company (EDC) is considering outsourcing its Payroll Department to a payroll processing company for an annual fee of $220,800. An internally prepared report summarizes the Payroll Department’s annual operating costs as follows: Supplies $ 30,800 Payroll clerks’ salaries 120,800 Payroll supervisor’s salary 58,800 Payroll employee training expenses 10,800 Depreciation of equipment 20,800 Allocated share of common building operating costs 15,800 Allocated share of common administrative overhead 28,800 Total annual operating cost $ 286,600 EDC currently rents overflow office space for $36,800 per year. If the company closes its Payroll Department, the employees occupying the rented office space could be brought in-house and the lease agreement on the rented space could be terminated with no penalty. If the Payroll Department is outsourced the payroll clerks will not be retained; however, the supervisor would be transferred to the company’s Human Resource Management Department. As a result of this transfer, the company would discontinue its efforts to hire a new Human Resource Manager for whom it expected to pay an annual salary of $56,800. The Payroll Department’s equipment would be transferred to other departments within the company to replace outdated equipment that would be recycled for zero salvage value. Required: What is the financial advantage (disadvantage) of outsourcing the Payroll Department?
Express Delivery Company (EDC) is considering outsourcing its Payroll Department to a payroll processing company for an annual fee of $220,800. An internally prepared report summarizes the Payroll Department’s annual operating costs as follows:
| Supplies | $ 30,800 |
|---|---|
| Payroll clerks’ salaries | 120,800 |
| Payroll supervisor’s salary | 58,800 |
| Payroll employee training expenses | 10,800 |
| Depreciation of equipment | 20,800 |
| Allocated share of common building operating costs | 15,800 |
| Allocated share of common administrative overhead | 28,800 |
| Total annual operating cost | $ 286,600 |
EDC currently rents overflow office space for $36,800 per year. If the company closes its Payroll Department, the employees occupying the rented office space could be brought in-house and the lease agreement on the rented space could be terminated with no penalty.
If the Payroll Department is outsourced the payroll clerks will not be retained; however, the supervisor would be transferred to the company’s Human Resource Management Department. As a result of this transfer, the company would discontinue its efforts to hire a new Human Resource Manager for whom it expected to pay an annual salary of $56,800.
The Payroll Department’s equipment would be transferred to other departments within the company to replace outdated equipment that would be recycled for zero salvage value.
Required:
What is the financial advantage (disadvantage) of outsourcing the Payroll Department?
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