Hudson University has just received a proposal from Speak and Tell (S& T), a New York public relations firm. Under the terms of the proposal, S& T has offered to meet all of the university’s external media relations needs at a fixed cost of $ 750,000 per year.
These activities are currently performed by Hudson staff. The expenses associated with the media relations department during the current year were as follows:
Staff Salaries: $ 650,000 including a senior staff member who is paid $ 80,000 and who will remain on staff to oversee the university’s interests in dealings with the public relations firm. All other staff would be let go. The university incurs additional costs for health care and other benefits at a rate of 30 percent of staff salaries.
Fixed Equipment: The computers and media equipment in the department were purchased four years ago. They cannot be used by any other department at Hudson and cannot be sold. Depreciation expenses from the equipment are $ 20,000 per year. The net book value of the equipment is $ 60,000. Printing Costs: If the university contracts out it will no longer have to print external media documents, which cost $ 150,000 this year.
1. Which of the costs listed above should be included in Hudson’s consideration of the proposal? Why should they be included?
2. Based solely on financial considerations, should Hudson accept the contract? Why?