Problem 7-2 (Part Level Submission) Kokomo College is considering outsourcing gr
ID: 2557193 • Letter: P
Question
Problem 7-2 (Part Level Submission)
Kokomo College is considering outsourcing grounds maintenance. In this regard, Kokomo has received a bid from Highline Grounds Maintenance for $287,400 per year. Highline states that its bid will cover all services and planting materials required to “keep Kokomo’s grounds in a condition comparable to prior years.” Kokomo’s cost for grounds maintenance in the preceding year were $297,200, as follows:
Salary of three full-time gardeners $181,700
Plant materials 79,500
Fertilizer 10,600
Fuel 12,900
Depreciation of tractor, mowers, and other miscellaneous equipment 12,500
Total $297,200
If Kokomo College outsources maintenance, it will be able to sell equipment for $32,100, and the three gardeners will be laid off.
Analyze the 1-year financial impact of outsourcing grounds maintenance.
Net (Benefit or Cost) of outsourcing in year 1 is $? .
Explanation / Answer
Analysis of 1-year financial impact of outsourcing grounds maintenance.
Year-One Financial Impact
Cost To Outsource $2,87,400
Less:Deduct Sale of Equipment 31,100
Groundskeepers' Salaries 1,81,700
Net Cost To Outsource 74,600
Current Cost of Maintenance 2,84,700
(Cost-Equipment Depreciation)
($297200 - $12500)
Net Difference $ 1,47,400
Savings
Current Cost of Maintenance $2,84,700
(Cost-Equipment Depreciation)
Cost To Outsource
Groundskeepers' Salaries$ 1,81,700
Net Outsourcing Cost $1,03,000
Net Savings $1,81,700
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