Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’s payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.

Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:

1. The current payroll software that was purchased for \(4,000 three years ago would not be needed if payroll processing were outsourced.

2. Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid \)450 per week.

3. Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is \(42,000.

4. The payroll processing service would charge \)2,000 per month.

Requirements

1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating income?

2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act ethically?

Step by step solution

01

Meaning of Operating Income

Operating income refers to the revenues generated by a business concern through its significant functions, such as selling and purchasing goods and services. Operating income indicates theefficiency of the business and theeffectiveness of its strategies.

02

Changes in operating income

Particulars	Amounts ($)
Salary of payroll clerk	42,000
Less: Payroll outsourcing service cost	(24,000)
Increase in operating income	$18,000

03

Final decision

If the company decides to outsource thepayroll service,it will be cheaper; but laying off a team member is not ethical.

Therefore, to save the cost of payroll ethically, the controller should allocate other tasks to Toby instead of laying him off.

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