Lillis, Ltd., is considering outsourcing its accounts receivable function, a support service in the finance department Lillis' cost-management analyst expects annual benefits that include personnel cost savings of 5121,000, facilities savings of 590.000, other support service cost savings of 560,000, and no loss of service quality. The analyst also estimated annual costs of the decision to include the contract cost to DeGama Enterprises of 5160,000, severance costs of dismissed personnel of 520,000, and contract administration costs of 512,000.
Required
a. Based on the quantifiable benefits and costs of the decision, would you recommend that Lillis outsource its accounts receivable function? What qualitative factors should Lillis also consider?
b. Lillis did outsource the accounts receivable function and measured actual benefits to include personnel cost savings of 582.000, facilities cost savings of 5100.000, and support service cost savings of 570,000. Actual costs included 5160.000 for the outsourced service, 530,000 for training costs, and 513.000 for contract administration. Furthermore, customer billing complaints were lower than in previous years; sales growth was lower: and employee turnover in other support service areas was higher. Prepare an variance analysis.
c. On balance, do you agree with the outsourcing decision? Why or why not?