Question

An external payroll processing firm has offered these services to Chameleon at a cost of $1,350 per month. The outside firm will provide all supplies. However, if Chameleon used the outside firm, its accountants who currently process payroll would be reassigned to other projects (i.e. the accountants’ labor is unavoidable). Common fixed overhead is also not avoidable. How much would monthly costs be affected if Chameleon, Inc. switched to the payroll processing firm?

Answer 1

Answer:

monthly costs would increase by $1,350

Explanation:

Since basically no current cost is avoidable, i.e. labor costs remain the same and common fixed costs remain the same, the only possible cost reduction could be less office supplies used which is basically a marginal cost. Since no costs will decrease, then the incremental analysis = $1,350 (increased costs) - $0 = $1,350