Question - Incremental Analysis of Outsourcing Decision
Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $307,640 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 $316,290 as follows:
Salary of three full-time gardeners $200,300
Plant materials 85,100
Fertilizer 7,130
Fuel 9,870
Depreciation of tractor, mowers, and other
Miscellaneous equipment 13,890
Total $316,290
If Oakland College outsources maintenance, it will be able to sell equipment for $31,630, and the three gardeners will be laid off.
Analyze the one-year financial impact of outsourcing grounds maintenance.
How will savings in the second year differ from those in year 1?