Kensingtown Processing Company provides word-processing services for business clients and students in a university community. The work for business clients is fairly steady throughout the year. The work for students peaks significantly in December and May as a result of term papers, research project reports, and dissertations.

Two years ago, the company attempted to meet the peak demand by hiring part-time help. This led to numerous errors and much customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis in place of part-time help. This proved to be much better in terms of productivity and customer satisfaction. But, it has caused an increase in annual payroll costs and a significant decline in annual net income.

Recently, Valarie Flynn, a sales representative of Metcalfe Services Inc., has made a proposal to the company. Under her plan, Metcalfe will provide up to four experienced workers at a daily rate of $75 per person for an 8-hour workday. Metcalfe workers are not available on an hourly basis.

Kensingtown would have to pay only the daily rate for the workers used. The owner of Kensingtown Processing, Donna Bell, asks you, as the company’s accountant, to prepare a report on the expenses that are pertinent to the decision. If the Metcalfe plan is adopted,

Donna will terminate the employment of two permanent employees and will keep two permanent employees. At the moment, each employee earns an annual income of $21,000. Kensingtown pays 8% FICA taxes, 0.8% federal unemployment taxes, and 5.4% state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Kensingtown pays $40 per month for each employee for medical and dental insurance. Donna indicates that if the Metcalfe Services plan is accepted, her needs for temporary workers will be as follows.

Instructions

With the class divided into groups, answer the following.

(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Metcalfe Services Inc. plan.

(b) What other factors should Donna consider before finalizing her decision?

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Number of Employees 2 3 Working Months January-March April-May June-October November-December Days per Month 20 25 18 23 3