Matrix human resources company is deciding to outsource its payroll department to anotherHeadquarter will free up time to enable Matrix to work on Human resources activities.

Cost information on internal completing the payroll function internally is as follows:

Direct Labour : 11,000

Variable Overhead : 3,000

Fixed Overhead : 16,000

________

Total 30,000

Fixed overhead will continue if Payroll is outsourced or not. an outside Consulting firm has agreed to complete Payroll for 15,000 per Year. No additional cost of purchasing the service will occur other than the 15,000 purchase price.

Required:

1. now assume that fixed overhead include 5,000 of cost that can be avoided if the services are purchased externally. which alternative is most cost effective and by how much?