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Outsourcing Accounts' Receivable Function

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Cal's Carpentry is considering outsourcing its accounts receivable function. Currently, Cal employs two full-time clerks and one part-time clerk to manage accounts receivables. Each full-time clerk has an annual salary of $36,000 plus fringe benefits costing 30 percent of their salary. The part-time clerk makes $18,000 per year but has no fringe benefits. Total salary plus fringe cost is $111,600. Cal estimates that each account receivable incurs a $10 variable cost. The Small Business Accounts Receivables Group (SBARG) specializes in handling accounts receivable for small- to medium-size companies. Doris Roberts from SBARG has offered to do the account receivables for Cal's Carpentry at a fixed cost of $75,000 per year plus $30 per account receivable. Next year, Cal expects to have 2000 accounts receivables.

Calculate the cost for Cal's Carpentry to continue doing accounts receivable in-house.
Total Cost = $

Calculate the cost for Cal's Carpentry to use SBARG to handle the accounts receivable.
SBARG cost =

Downhill Boards (DB), a producer of snow boards, is evaluating a new process for applying the finish to its snow boards. Downhill Boards currently incurs a fixed annual cost of $125,000 and has a variable cost of $0.90 per unit. Annual demand for the snow boards is 160,000. Fast Finish, Inc. (FFI) has made a technological breakthrough in snow board finish application. FFI will apply the finish for $0.23 per unit in variable costs plus a fixed annual cost of $230,000.

What will it cost Downhill Boards to outsource the finishing process?
Total Cost from FFI = $.
_______________ is (higher/lower) than insourcing.

At what demand level does it make sense economically to outsource the finishing process?

Better to outsource when demand is _________________ more.

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Solution Summary

A explanation of the calculations necessary to determine if the accounts receivable function of a business should be outsourced.