AP7-2 (a,b) Incremental Analysis of Outsourcing Decision [LO 1, 2, 4] Oakland Co
ID: 2354371 • Letter: A
Question
AP7-2 (a,b)Incremental Analysis of Outsourcing Decision [LO 1, 2, 4]
Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $304,100 per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance in the preceding year were $313,040 as follows:
Salary of three full-time gardeners $195,530
Plant materials 85,990
Fertilizer 8,150
Fuel 9,130
Depreciation of tractor, mowers, and other
miscellaneous equipment 14,240
Total $313,040
If Oakland College outsources maintenance, it will be able to sell equipment for $31,230, and the three gardeners will be laid off.
Analyze the one-year financial impact of outsourcing grounds maintenance. $___________________
AE9-11
Depreciation Tax Shield [LO 4]
Strauss Corporation is making a $70,000 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company’s required rate of return is 11 percent.
What is the present value of the tax savings related to depreciation of the equipment?
(Round the present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and the final answer to 2 decimal places, e.g. 25.21.)
Present Value $ ______________
Explanation / Answer
Not Outsource
Outsource
Net income (incease or decrease)
Salaray - gardeners
195530
0
195530
Plant materials
85990
0
85990
Fertilizer
8150
0
8150
Fuel
9130
0
9130
Misc. Equip
14240
0
14240
Outsource cost
0
304100
-304100
Sale of equipment
0
31230
31230
Total
313040
272870
40170
1st year Savings of 40,170 or Net income will increase by 40,170.
Second year: Won’t have the 31230 from the sale – so savings will decrease by 31230 2nd year.
Continue
Eliminate
Net Income (increase or decrease)
Contribution Margin
308,600
0
-308,600
Direct Salaries
66900
0
66900
Total
241,700
0
-241,700
Impact is 241,700 worse off
Not Outsource
Outsource
Net income (incease or decrease)
Salaray - gardeners
195530
0
195530
Plant materials
85990
0
85990
Fertilizer
8150
0
8150
Fuel
9130
0
9130
Misc. Equip
14240
0
14240
Outsource cost
0
304100
-304100
Sale of equipment
0
31230
31230
Total
313040
272870
40170
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