Question

Each year, Sunshine Motos surveys 7,500 former and prospective customers regarding satisfaction and brand awareness. For the current year, the company is considering outsourcing the survey to Global Associates, who have offered to conduct the survey and summarize results for $30,600.Craig Sunshine, the president of Sunshine Motors, believes that Global will do a higher-quality job than his company has been doing, but is unwilling to spend more than $10,000 above the current costs. The head of bookkeeping for Sunshine has prepared the following summary of costs related to the survey in the prior year.

Mailing $16,400

Printing (done by Lester Print Shop) $4,500

Salary of Pat Fisher, part-time employee who stuffed envelopes and summarized data when surveys were returned (100 hours X $15) $1,500

Share of depreciation of computer and software used to track survey responses and summarized results. $1,100

Share of electricity/phone/etc. based on square feet of space occupied by Pat Fisher vs. entire company. $500

REQUIRED: What is the incremental cost of going outside versus conducting the survey as in the past? Round to two decimal places.

Answer 1

To find the Incremental cost, we have to find out which are the fixed and variable cost in the prior year, as fixed cost remain same and is irrelevant cost.

Fixed Cost (Irrelevant Cost)

1. Share of Depreciation - This cost is fixed as depreciation will be charged irrespective of use of the computer and software for survey.

2. Share of electricity and Phone - Since the company has to pay in any case wether conducting survey or not, the rent for the space.

Variable Cost (Relevant Cost)

Mailing Cost = $16400

Printing = $4500

Salary of part time employees ( It is included because they are part time employees , who has been used only for survey related work) = $1500

So Total Relevant Cost = 16400+4500+1500 = $22400

Incremental cost of going outside = 30600 - 22400 = $8,200.00