Using the information that Falkirk gathered on potential real estate savings through relocation, estimate the annual cost savings available through relocating some or all of the accounting functions to New Jersey.

Case link: https://www.csus.edu/indiv/p/pforsichh/documents/Costs-for-Decision-Making-An-Instructional-Case-of-RelevantCosts.pdf

enefits as well as other associated costs. To estimate the of employees that would be retained and the potential imp ct on staff, she uses 10 employees processing 606,000 severance costs if a portion of the accounting functions are checks a qually and assumes that 50% of the pay rents relocated to N.J. could become electronic. To calculate the potential savings He assumes that department heads and their assistants in salaries and be fits, she assumes that they staff reductions would have offices in both the corporate headquarters and would involve less-ex rienced staff and represent 15% of the N.J. location. He estimates that 250 square feet of total salaries and benefits accounts payable. She estimates office space per position will be needed for each employee also that there would be savin in ersonal computer (PC) relocated from the New York office and a comparable costs, IT support, and other costs ($1,775 per employee. amount would be available for subleasing. He assumes Additionally, there would be a duct in postage costs in 100% of all employees who are N.J. residents would be direct proportion to the reduction of the h mber of checks. retained. Of the residents not in New Jersey, he assumes all These savings would be partially offset by an Nditional cost department heads and their assistants would remain while of $0.125 for each electronic payment that replace a check. all other employees not from New Jersey would terminate, Further, she uses the information from Table 6 to est gate and severance would be paid to any employee not relocating. that severance costs would represent 15% of the maximum Information regarding the company's severance policy is igible severance for accounts payable. provided in Table 7, section F, and summary employee information by department is in Table 6. RELOCATION INTERACTION OF ALTERNATIVES Falkirk meets with the head of corporate facilities to discuss the availability of space in the N.J. service center and the the company only outsources bank reconciliations, the possibility of subleasing any excess space created in the New team has assumed that the bank reconciliation department York office. The head of facilities states that the company will need to retain the most experienced employe -to currently has more than 4,000 square feet of excess space support the process. The most experienced employee in the in N.J. There also is up to an additional 28,500 square feet department has eight years of service, a salary f $48,000, of space available in the building that could be leased for health insurance costs of $10,000, 401(k) contributions at approximately $25 per square foot. But space must be leased 5%, and payroll taxes of 7.65%. In addition to the savings in blocks of 9,500 square feet, which is equivalent to one in salaries and benef for the positions e minated in bank floor in the building. reconciliations, it is also estimated that here would be a Also, the head of facilities states that the company savings of $8,000 in total for expenses other than salaries currently has approximately 3,500 square feet of excess and benefits. The one tim initial costs would consist of space in the New York office and could sublease the space severance costs for the positions ed Iminated. in blocks of 10,000 square feet (equivalent to one floor). But if a block or blocks of 10,000 square feet of space cannot CASE QUESTIONS be created, the available space could not be subleased. Given current real estate prices, he estimated the sublease Provide responses, disple ing all work, to the following rent would be $65 per square foot. Based on past moves, questions: he estimates the costs to move employees and set up new 1. General Questions workstations average $1,000 per position in the new space a. What costs an relevant to each of the the plus $50,000 per floor to build out and wire the new space. alternatives offshoring, relocating function and Falkirk prepares a grid (see Table 5) highlighting the automating functions? level of management and interdepartment interaction as well b. What are come of the nonfinancial consideration as the number of N.J. resident employees in each function. associated with each of these alternatives? He believes that those functions with the lowest level of interdepartment and management interaction would be best 2. Offshoring Analysis: for possible relocation and selects the departments with low a. Basedon George's assumptions that all of the to medium interdepartment rankings. Additionally, Falkirk remaining supervisor's costs are split 65% to accounts prepares a summary list of employees by function and payable and 35% to bank reconciliation, and all their residence (see Table 6) to estimate the likely number incremental ongoing technology costs and postageTable 5: Matrix for Evaluating Relocation Prospects Number of Management Interdepartment Employee(s) Function Employees Interaction Interaction in N.J. Tax Department Federal tax preparation 8 Low Low State tax preparation 12 Low Low Tax planning and management 2 High Medium Controller's Department Controller 2 High High SEC reporting 7 Medium Low U.S. GAAP reporting 7 Medium Low Regulatory financial reporting 6 Medium Low Management reporting 6 Medium High Cost accounting 6 Medium Low 5 General accounting 10 Medium Low Accounts payable 10 Low Medium Bank reconciliations 5 Low Low Financial Planning and Analysis Planning and budgeting 4 Medium High 2 Financial analysis High High 93 64Table 6: Summary Employee Information for Severance Calculations Actual Costs Number of Weeks of Eligible Total Annual Benefits Employees Severance Salaries Load Health 401 (k) Payroll Taxes Tax Department: Department head and assistant 2 32 $250,000 $62,500 $17,200 $12,500 $19,125 Federal Tax N.J. residents 76 445,000 111,250 32,200 22,250 34,043 Non-N.J. residents 66 357,000 89.250 27,200 17,850 27,311 Tota 8 142 802,000 200,500 59,400 40,100 61,354 State Taxes N.J. residents 627,000 156,750 76,600 31.350 47.966 LO 140 Non-N.J. residents 52 185,000 16.250 20.000 9.250 14.153 Total 12 192 812,000 203,000 96,600 40,600 62,119 Controller's Department: Department head and assistant 28 285,000 71,250 15,000 14,250 21,803 SEC Reporting N.J. residents 96 379,000 94,750 34,400 18.950 28.994 Non-N.J. residents 36 146.000 36.500 17,200 7.300 11,169 Total 132 525,000 131,250 51,600 26,250 40,163 U.S. GAAP Reporting N.J. residents 74 413,500 103,375 37,200 20,675 31.633 Non-N.J. residents 30 161,500 40.375 12,200 .075 12.355 Total 104 575,000 143,750 49,400 28,750 43,988 Regulatory Reporting N.J. residents 52 351,000 87,750 27,200 17.550 26.852 Non-N.J. residents 30 174,000 43,500 17,200 8,700 13,311 Total 82 525,000 131,250 44,400 26,250 40,163 Management Reporting N.J. residents 52 303,000 75,750 27,200 15,150 23,180 Non-N.J. residents 30 152.000 38.000 17.200 7.600 11.628 Total 82 455.000 113,750 14.400 22,750 34,808 Cost Accounting N.J. residents 70 322,000 80,500 34,400 16,100 24,633 Non-N.J. residents 12 63.000 15,750 10.000 3.150 4.820 Tota 6 82 385,000 96,250 44,400 19,250 29,453 General Accounting N.J. residents 128 559,000 139,750 69,400 27.950 42,764 Non-N.J. residents 18 69.000 17,250 7.200 3.450 5.279 Total 10 146 628,000 157,000 76,600 31,400 48,042Table 6: Summary Employee Information for Severance Calculations (continued) Actual Costs Number of Weeks of Eligible Total Annual Benefits Employees Severance Salaries Load Health 401(k) Payroll Taxes Accounts Payable N.J. residents 106 333,000 83,250 46,600 16,650 25,475 Non-N.J. residents 60 137,000 34.250 25.000 6.850 10,481 Total 10 166 470,000 117,500 71,600 23,500 35,956 Bank Reconciliation N.J. residents 3 42 137,000 34,250 30,000 6.850 10,481 Non-N.J. residents N 24 78.000 19,500 12,200 3,900 5.967 Total 66 215,000 53,750 42,200 10,750 16,448 Financial Reporting & Analysis Department: Budgeting N.J. residents 28 177,000 44,250 12,200 8,850 13,541 N N Non-N.J. residents 26 148.000 37,000 15,000 7.400 11,322 Total 54 325,000 81,250 27,200 16,250 24,863 Financial Analysis N.J. residents 72 526,000 131,500 39,400 26,300 40,239 Non-N.J. residents 30 159,000 39.750 17,200 7.950 12,164 Total 102 685,000 171,250 56,600 34,250 52,403 The severance and continuing benefits for the accounts payable manager total $29,073, and the severance and continuing benefits for the most experienced staff member in bank reconciliations is $19,714. Note: When calculating severance using the total salaries, you must first find the average weekly salary (salariesumber of employees/52 weeks) and multiply by the number of weeks of severance. Follow a similar process for health benefits. For 401(k] and payroll taxes, you may either follow the same process or apply the rate. Table 7: Supplemental Information on Relevant Expenses A. The benefits load of 25% of salaries is designed to represent the costs to provide health, dental and vision insurance, the employer contribution to the 401 (k) plan, and employer payroll taxes. 1. The company's share of health benefits (including dental and vision insurance) is $10,000 per year for family (F), $7,200 for parent/children or employee/ spouse (P/C), and $5,000 for single (S) employees. 2. The employer portion of payroll taxes is 7.65% of salaries. 3. The company contribution to the 401(k) plan is 5% of salaries. "The company has eight years remaining on its lease and is unlikely to be able to reduce space unless it can create 10,000 square feet (one floor) of available space for sublease. Based on an average of 250 square feet per employee, staff in the New York office would need to be reduced by 40 or more. 1. The company pays $65 in rent per square foot in New York. The standard workstation is approximately 250 square feet per employee, and office space of a department head and assistant are 500 square feet in total. 2. The rent per square foot is $25 in the service center in N.J., located just across the Hudson River from the New York headquarters. The corporate expense allocation is for the company cafeteria and an on-site gym; the company's costs are unlikely to fall if staff in the Accounting Department is reduced. D. PC's are leased, and the company can return them with no penalty; 50% of the IT support costs are variable and can be saved when the PC's are eliminated. E. The postage costs in accounts payable would not change by offshoring or relocation as the checks would be printed and mailed from the company's office in the U.S. F. The company severance policy calls for two weeks of salary for each year of service with minimum payment of 12 weeks. Health benefits and retirement plan contributions continue to be provided during the severance period. Payroll taxes would also apply