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Problem 7-2 Incremental Analysis of Outsourcing Decision

Problem 7-2 Incremental Analysis of Outsourcing Decision
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MT425 / MT 425
Managerial Finance and Accounting
Kaplan University (KU Campus)

James Jiambalvo
Managerial Accounting, 4e
Hoboken, NJ: John Wiley & Sons.

Unit 6: Management Accounting in a Competitive Business Environment

Chapter 7 Problem 7-2
Incremental Analysis of Outsourcing Decision [LO 1, 2, 4] Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $295,000 per year. Highline states that its bid will cover all services and planting materials required to“keep Oakland’s grounds in a condition comparable to prior years.” Oakland’s cost for grounds maintenance in the preceding year were $302,000 as follows:

Salary of three full-time gardeners $195,000
Plant materials 80,000
Fertilizer 7,000
Fuel 8,000
Depreciation of tractor, mowers, and other miscellaneous equipment 12,000
Total $302,000

If Oakland College outsources maintenance, it will be able to sell equipment for $30,000, and the three gardeners will be laid off.

a. Analyze the one-year financial impact of outsourcing grounds maintenance.
b. How will savings in the second year differ from those in year1?
c. Discuss qualitative factors that should be considered in the decision.



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