Mary Tan is the controller for Duck Associates, a property management company in

Question

Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’ payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.

Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:

a. The current payroll software that was purchased for $4,000 three years ago would not be needed if payroll processing were outsourced.

b. Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid $450 per week.

c. Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is $42,000.

d. The payroll processing service would charge $2,000 per month.

1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating income?

2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act ethically?

Explanation / Answer

Current Payroll Incremental System Services Benefit Half of Book keeper salary 11700 11700 0 Toby stock's Salary 42000 0 42000 Payroll Service charge 0 24000 -24000 Total Cost 53700 35700 18000 Question 1. Outsourcing will increase net income by $18,000 per year. Question 2. if Duck associate want to keep, they have to bear his salary even if paroll services is hired. So in this case Cost of Paroll services will be 35700+42000 = 77,700. Hence Hiring Payroll services is costlier than current system. And should not be outsourced.

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