Recently, Claude Manufacturing was approached by a firm that is offering to provide accounting and tax services for $500,000 annually. Historically, Claude Manufacturing has completed these tasks in-house and must now decide if the company should continue with this process or accept the supplier's offer. By accepting the firm's offer, Claude Manufacturing can save 60 per- cent of fixed expenses in addition to relevant labour and variable expenses. To evaluate this decision, Claude Manufacturing gathered the following annual cost information for the accounting and tax services department:
Total Cost
Direct labour .............................. $225,000
Variable overhead ........................ 62,500
Fixed overhead ........................... 325,250
Total ....................................... $612,750
Required:
1. List the relevant cost(s) of internally providing the services and externally purchasing from another organization.
2. Which alternative is more cost effective and by how much?
3. At what cost of outsourcing would Claude Manufacturing be indifferent between providing the services in-house and outsourcing to another company?
4. What other factors should Claude Manufacturing consider before deciding to outsource these services?