Express Delivery Company (EDC) is considering outsourcing its Payroll Department to a payroll processing company for an annual fee of $222,800. An internally prepared report summarizes the Payroll Department's annual operating costs as follows:
Supplies $ 32,800
Payroll clerks' salaries 122,800
Payroll supervisor's salary 60,800
Payroll employee training expenses 12,800
Depreciation of equipment 22,800
Allocated share of common building operating costs 17,800
Allocated share of common administrative overhead 30,800
Total annual operating cost $ 300,600
EDC currently rents overflow office space for $38,800 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 $58,800.
The Payroll Department's equipment would be transferred to other departments within the company to replace outdated equipment that would be recycled for zero salvage value.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?
Answer is complete but not entirely correct.
Financial advantage of outsourcing $ 175,400
