Question

Each year, Beca Motors surveys 8,100 former and prospective customers regarding satisfaction and brand awareness. For the current year, the company is considering outsourcing the survey to RBG Associates, which has offered to conduct the survey and summarize results for $33,652. Craig Knight, the president of Beca Motors, believes that RBG will do a higher-quality job than his company has been doing but is unwilling to spend more than $10,000 above current costs. The head of bookkeeping for Beca has prepared the following summary of costs related to the survey in the prior year:Mailing $17,500Printing (done by Lester Print Shop) 6,000Salary of Pat Fisher, part-time employee who stuffed envelopes and summarized data when surveys were returned (130 hours × $16) 2,080Share of depreciation of computer and software used to track survey responses and summarize results 1,200Share of electricity/phone/etc. based on square feet of space occupied by Pat Fisher vs. entire company 600Total $27,380What is the incremental cost of going outside vs. conducting the survey as in the past? Will Craig Knight accept the RBG offer?

Answer 1

Answer:

a) incremental cost = $8,072

b) Craig should accept the RBG offer since the incremental cost is less than $10,000

Explanation:

First the question states to determine the relevant costs of two different options

Option 1: To accept the offer at $33,652

Option 2: Reject the offer but conduct the survey as in the past.

Step 1: The offer is $33,652

Step 2: Determine the cost of the survey done as in the past based on relevant costs.

The relevant costs are Mailing, Printing by Lester and the Salary of Pat Fisher

The irrelevant costs are depreciation of computer and share of electricity, these are fixed costs.

So calculate the relevant costs

Mailing = $17,500

Printing = $6,000

Salary = $2,080

The total relevant cost for in house survey = $25,580

Step 3: We determine the difference between the offer and the cost of in house survey

Incremental Cost = $33,652 - $25,580

= $8,072

Since this is less than the $10,000 the company is willing to spend above the current costs. Then Beca Motors should accept the offer.