Question

incremental analysis of Outsourcing Decision [LO 1, 2] Selzer & Hollinger, a legal services firm, is considering outsourcing its payroll function. It has received a bid from ABC Payroll Services for $22,000 per year. ABC Payroll will provide all payroll processing, including employee checks and payroll tax reporting. Selzer & Hollinger’s costs for payroll processing in- house over the past year were as follows: cost Payroll clerk (part time) Annual cost of payroll processing software updates Human resources manager’s salary Depreciation of computers used in payroll processing Annual payroll tax update seminar costs for one employee amount $12,000 1,000 80,000 2,000 1,500 Currently the payroll clerk works only on payroll processing, and will be laid off if payroll is out- sourced. The human resources manager spends 25 percent of her time currently on payroll-related issues. The computers would remain and be used for other tasks if payroll is outsourced. RequiRed a. What is the annual impact of outsourcing payroll? Will the company save money or spend extra money if payroll is outsourced? b. What qualitative factors should be considered in this decision?

Answer 1

Selzer & Hollinger will save $14,500 per year by outsourcing its payroll processing. In addition to cost savings, qualitative factors such as service quality, data security, control over processes, and employee morale must be considered in the decision.

Step-by-step explanation:

The task is to evaluate the annual impact of outsourcing payroll services and whether it will result in savings for Selzer & Hollinger. The in-house costs for payroll processing were:

• Payroll clerk: $12,000
• Annual software updates: $1,000
• Depreciation of computers: $2,000
• Annual payroll tax update seminar: $1,500

Since the payroll clerk will be laid off, this cost would be eliminated. The human resources manager's salary is $80,000, but only 25% of her time is spent on payroll-related work, amounting to $20,000 ($80,000 * 25%) relevant to the calculation.

Calculating the impact of outsourcing

1. Sum the relevant in-house payroll costs: $12,000 (clerk) + $1,000 (software) + $2,000 (computer depreciation) + $1,500 (seminar) + $20,000 (manager's time) = $36,500 total in-house costs.
2. Outsourcing cost: $22,000 from ABC Payroll Services.
3. Savings if outsourced: $36,500 (current in-house costs) - $22,000 (outsourcing cost) = $14,500 savings per year.

Therefore, Selzer & Hollinger will save money by outsourcing payroll processing. When considering whether to outsource, however, they should also weigh qualitative factors such as the quality of services, security of payroll data, potential loss of control over payroll processes, and impacts on employee morale.