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Telford Engineering has identified a global business services partner off-shore. The annual cost of outsourcing the accounting function per annum is forecast to be $292,000. The GBS Company will take over the highly systemised and transactional operations
of payables, receivables, payroll and credit control. Long-term asset and treasury and cash management will remain in-house.
Outsourcing would take place immediately following MEXIT (in about one year’s time) and annual outsourcing costs are estimated to remain constant over time. The total cost of making the staff redundant under the outsource option is estimated to be 25%
of their current annual salaries. Outsourcing would mean that 40% of the other non-staff accounting department costs could be saved each year.
The retained skeleton staff, post-outsourcing, will be paid at 20% more than their current salaries.Note: The remaining staff to be retained under the Outsource Option will be as follows:
Head of Accounting (unchanged salary) + 2 Fully Qualified (FQ) Accountants and one Part Qualified (PQ) AccountantHad done in several ways but got incorrect answer.
But what is the requirement? Are you looking for just first year impact on profit/cash flows? Or at longer time horizon? Are you required to consider the time value of money?
The decision to outsource has:
An annual cost in perpetuity of $292k
A one-off cost (25% of $x amount) of making staff redundant
An annual saving (40% of accounting department costs that are not staff costs – because the department is smaller)
A 20% increase in annual cost for the retained staff (because they have more responsibilities).there are 2 other costs are given in accountancy department..1 is amortisation of non current asset and second is admin costs of material and variable overheads…I have tried to taking 40 of them but still got incorrect ans
Perhaps there is something to indicate that the amortisation of non-current asset should be ignored. If this is a decision-making requirement, amortisation (like depreciation) is not a cash flow and so not a relevant cost/saving and should therefore be ignored.
can you please give me a formate toby which i can calculate the outsourcing cost as I have tried even taking 40% of only material and variable overheads..but still got incorrect ans…
As I said, tutors do not have access to the final assessment – so I do not know what it asks. Perhaps you are entering the answer incorrectly – if answer is required as $000s it would be 40 not 40000 for example. I did not even know that you have to get all Qs correct – I assumed there was 50% pass mark on the final assessment.
I can not get the rigth answer still. For outsourcing option:
1. 292K outsourcing
2. One off cost 140K (staff redundancy)
3. 40% saving of other costs 240K – 144K cost
In total it makes 790K cost for next yearWhere is the mistake?
Have you read the preceding posts? Is the 20% increase not relevant also?
Dear Kim, thanks for reply. 20% increase will be applied to the 2 Fully Qualified (FQ) Accountants and one Part Qualified (PQ) Accountant only
Hi! As Kim mentioned earlier there are 4 elements of the total accounting cost for Option B:
– The outsourcing cost: 292
– Redundancy cost: 25% of the current annual salaries of the redundancy – but here you have to take into account those who plan to leave before Mexit as the company do not have to pay any redundancy cost after them (this information was in the first spreadsheet)
– Remaining other cost after the saving, so you have to calculate with the 60%, not the 40
– Cost of the remained staff – here you have to apply the 20% increase only for the retained FQs and PQ as already mentioned and add it to the unchanged salary of the Head of accounting.I hope you can calculate it now, my answer was correct and I could pass this quiz.
@Fasih – please consider the ETHICS of your request – there is more than enough information on this thread
Can you please let me know what I did wrong in my calculations? It still shows as wrong when I input 927.
@Cezar102 – please read the “tips” in semkoua’s post above (July 21)
I hope you were all able to get the correct answer. To add to Semkoua’s explanations, amortisation has to be included is included in the 60% of other costs. I have just spent over 1 hour doing this question and that was the only part missing
@mozy – please read the “tips” in semkoua’s post above (July 21)
Hello Smith
I am still getting the wrong figure it been trying over 6 times..Am not sure where am missing it.
Cost of outsourcing 292k
One of cost (25%*370)140k
Cost after saving (60%× 240) 144k
Increase in salaries(120k* 1.2) 144k
Head of department salary 70k
Total 790. I don’t where is the mistake?I suggest @semkoua July 21, 2023 at 10:04 pm on this thread pretty much spells out the answer
For the redundancy cost, is it 25% of 560 = 140k ? Since 560 is it’s annual current salary?
@semkoua. Can you please explain redundancy cost and retained cost please
Thank you for this reply! I was missing the information that some employees wanted to leave anyway.
My only additional tip is to consider that “other non-staff accounting department costs” refers to: “Amortisation of non-current assets” and “Accounting admin costs: materials and variable overheads”. You should consider 60% of these costs remain.
Good luck to everyone! 🙂
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