Blake Furniture, Inc., maintains an Accounts Receivable Department that currentl

Question

Blake Furniture, Inc., maintains an Accounts Receivable Department that currently employs eight people. Blake is interested in doing an activity analysis because an outside firm has offered to take over a portion of the activities currently handled by the Accounts Receivable Department. The four main activities handled by the department are (1) billing and recording payments, (2) customer service activities, (3) financial reporting and analysis, and (4) collecting delinquent accounts. The salaries paid to the department's employees are as follows: Manager, 1 @ $65,000 per year $ 65,000 Clerks, 5 @ $30,000 per year 150,000 Account specialists, 2 @ $38,000 per year 76,000 Total $ 291,000 It is estimated that the manager of the Accounts Receivable Department spends an equal amount of her time supervising the four main activities. The clerks spend approximately half of their time on billing and recording payments. Their remaining time is divided equally between reporting activities and customer service. The two account specialists spend half of their time on delinquent account activities, and the rest of their time is split equally between financial analysis activities and customer service activities that the clerks are not qualified to perform. Paypro, Inc., has proposed that it can perform all the activities related to collecting delinquent accounts for a fee of $50,000 per year. The manager of Paypro argues that Blake can save $26,000 because the $76,000 in salaries paid to the specialists who currently handle all delinquent accounts can be eliminated. If the contract is accepted, it is estimated that the manager of the Accounts Receivable Department would need to devote a quarter of her time to dealing with Paypro employees. a. Using the information given, prepare an activity table to calculate the labor cost for personnel devoted to each of the four main activities of the Accounts Receivable Department. b. Should Blake accept or reject Paypro's offer to take over its delinquent account activities? Accept Reject

Explanation / Answer

Blake furniture Inc. a Details of activity wise cost Billing & Recording payment Customer service Financial reporting & Analysis Collecting delinquent accounts Internal cost of services Managers salary         16,250        16,250          16,250          16,250 Clerks salary         75,000        37,500          37,500                    -   Account specialist                  -          19,000          19,000          38,000 Total Internal cost         91,250        72,750          72,750          54,250 b Paypro proposal for collecting delinquent   Account activity performing   Fees         50,000 Avoidable cost of account specialist         38,000 So the proposal of outsourcing has incremental   cost of $12,000 per year Therefore the proposal should be rejected.

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