Relevant Costing - Managerial Accounting

Business: Creative Structures Inc. (CSI) rents out building-block sets for a fixed monthly fee. Customers' requests are made online and sets are delivered and returned via Canada Post, with customers assuming the shipping costs. CSI rents out an average of 90,000 sets per month but keeps approximately 120,000 sets on hand to allow for periods of higher-than-usual activity.

Sanitization Process: Each returned set is thoroughly cleaned, using a Health-Canada-approved solution and process that kills 99.99% of germs. Currently, one of the business partners oversees the sanitization process, managing a team of trained employees who operate the specialized equipment at the warehouse. CSI employs eight full-time employees in the sanitization department, at an average salary of $30,000 per year, including benefits. If sanitization is outsourced, these employees would be laid off. If laid off, they will receive severance of three months' salary and re-employment counselling totaling $5,000 for all 8 employees. The cleaning solution used in CSI's sanitization process costs $0.056 per set cleaned. The sanitization equipment cost $250,000 in 2018. CSI's sanitization process requires annual repairs and maintenance of $20,000, which is expected to maintain the equipment for the foreseeable future. If CSI decides to outsource, this equipment could be sold for $65,000.

The current staff level is appropriate for the current cleaning volume, but an employee must be hired for every additional 25,000 sets per month cleaned, at an annual cost of $30,000 per employee.

Question: Business owners need advice on whether to outsource the sanitization process or not. Be sure to discuss any qualitative aspects that may be appropriate.

APPENDIX I

INFORMATION ABOUT OUTSOURCING SANITIZATION PROCESS

Clean Crew (CC), a small private firm with great reputation in Markham, specializes in sanitizing toys and household products. CC's quoted price for its sanitization service is $0.21 per set.

CC will ship the sets to and from CSI's warehouse in Toronto at an extra charge of $8,000 per month, regardless of volume.

Thank you!