Matrix Human Resources Company is deciding to outsource its payroll department to another organization, which will free up time to enable Matrix to work on human resources activities. Cost information on internally 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 costs of purchasing the service will occur other than the $15,000 purchase price.

Required:

1. What are the two alternatives?

2. List the relevant costs of internally providing the service and externally purchasing them form the other organization.

3. Which alternative is more effective and why?

4. Now assume that fixed overhead includes $5,000 of costs that can be avoided if the services are purchased externally. Which alternative is most cost effective and by how much?