ACCOUNTING- Problem 7-2. Incremental Analysis of Outsourcing Decision [LO 1, 4] Selzer & Hollinger

Problem 7-2.
Incremental Analysis of Outsourcing Decision [LO 1, 4] Selzer & Hollinger,
a legal services firm, is considering outsourcing its payroll function. It has
received a bid from ABC Payroll Services, Inc., for $22,000 per year. ABC
Payroll will provide all payroll processing, including employee checks and
payroll tax reporting. Selzer & Hollinger’s cost for payroll processing
in-house over the past year were as follows:

Cost

Amount

Payroll clerk (part time)

$ 12,000

Annual cost of payroll processing software updates

1,000

Human resources manager’s salary

80,000

Depreciation of computers used in payroll processing

2,000

Annual payroll tax update seminar costs for one
employee

$ 1,500

Currently
the payroll clerk works only on payroll processing, and will be laid off if
payroll is outsourced. 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

What is the annual impact of outsourcing payroll? Will the
company save money or spend extra money if payroll is outsourced?
What qualitative factors should be considered in this
decision?