1. Sandra Pilsden, the Vice­President for Human Resources in Learning, Inc. was concerned about a recent memo she had recently received from the CEO's office regarding the possibility of outsourcing the payroll function to Salary Experts, a growing provider of a variety of human resource services. She was shocked that the CEO's office had discussed this matter with the Board of Directors, but failed to consult her.
Linden was preparing for a meeting with the CEO. In reading the memo and its attachments, Linden observed the following comparison of costs in a report prepared by the controller's office:
Payroll department expenses:
Salaries of employees $210,000
Share of utilities $75,000
Share of building rent $39,350
Manager's salary $69,000
Computers and supplies $26,000
Other department expenses $20,000
Total annual expenses $439,350 Pilsden also noted that Salary Experts quoted a fixed fee of $125,000 and variable processing costs of $7.50 per employee transaction. She did not believe that the company will actually save money by outsourcing the payroll function. For one, she did not think that the company will actually save all of the above mentioned amounts. She knew that the payroll department manager could not be removed from the company because he had to oversee the payroll function and serve as a liaison with the outside company. However, all other employees in the department would likely not be required.
Required:
a. Assume Learning Toys has 14,000 employees on its payroll. Can the company save money by outsourcing the payroll function?
b. What are the pros and cons of outsourcing the payroll function?