Kishwaukee Catering Company provides catering services for banquets, events, and other catering…

Kishwaukee Catering Company provides catering services for banquets, events, and other catering functions within a university community. The work is fairly steady throughout the year but peaks significantly in December and May as a result of holiday parties and graduation events. Two years ago, the company attempted to meet the peak demand by hiring part-time help. However, this led to numerous errors and considerable customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis instead of using part-time help. This proved to be much better in terms of productivity and customer satisfaction. But it has caused an increase in annual payroll costs and a significant decline in annual net income. Recently, Valarie Flynn, a sales representative of Harrington Services, Inc., has made a proposal to the company. Under her plan, Harrington Services will provide up to four experienced workers at a daily rate of $110 per person for an eight-hour workday. Harrington workers are not available on an hourly basis. Kishwaukee Catering would have to pay only the daily rate for the workers used. The owner of Kishwaukee, Martha Bell, asks you, as the company’s accountant, to prepare a report on the expenses that are pertinent to the decision. If the Harrington plan is adopted, Martha will terminate the employment of two permanent employees and will keep two permanent employees. At the moment, each employee earns an annual income of $30,000. Kishwaukee pays 8 percent FICA taxes, 0.8 percent federal unemployment taxes, and 5.4 percent state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Kishwaukee Catering pays $40 per month for each employee for medical and dental insurance. Martha indicates that if the Harrington Services plan is accepted, Kishwaukee’s needs for Harrington’s workers will be as follows.

 

MonthsNumber

 Working

Days per Month

January–March

2

20

April–May

3

25

June–October

2

18

November–December

3

23

Instructions

With the class divided into groups, answer the following:

(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Harrington Services, Inc., plan.

(b) What other factors should Martha consider before finalizing her decision?