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A company is deciding whether to purchase and maintain its own payroll system or to pay...

A company is deciding whether to purchase and maintain its own payroll system or to pay as a service from the cloud provider.

Estimate the 3-year cost of purchasing and maintaining the system considering one-time purchase costs of $12,000 for hardware and $10,000 for software. Also, consider the following maintenance, operation and upgrade costs per month: $100 for hardware, $100 for software, and $1,000 for IT staff.

Compare the total above with the 3-year cost of the cloud-based system for payroll processing. The cost to process payroll in the cloud is $200 per month (flat) plus $14 per employee per month if the company has 1-20 employees, $13 per employee per month for 21-50 employees, and $11 per employee per month for 51 or more employees. (Only one plan is needed, regardless of the number of locations.) The company estimates that the total number of employees will start at 15 and grow by 10% every month.

Make a model in which the company can change the estimates for the number of employees or unit fees and see the effects on the total cost.

business   accounting   
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Answer #1

Please find below the comparison. I have built the model in excel and the estimates for the cloud service options can be updated, not sure how to attach the excel here, but the numbers for the given problem are shared in the below tables.

Own Payroll System
Particulars Year 1 Year 2 Year 3 Total
One time purchase cost
Hardware $        12,000 $        12,000
Software $        10,000 $        10,000
Maintenance, Operation, Upgrade
Hardware ($100 / month) $          1,200 $          1,200 $          1,200 $          3,600
Software ($100 / month) $          1,200 $          1,200 $          1,200 $          3,600
IT staff ($1000 / month) $        12,000 $        12,000 $        12,000 $        36,000
Total $        36,400 $        14,400 $        14,400 $        65,200
Cloud based system for payroll processing
Particulars Year 1 Year 2 Year 3 Total
Flat rate $        2,400 $          2,400 $          2,400 $          7,200
Per Employee Per month rate $        4,163 $        11,196 $        34,672 $        50,031
Total $        6,563 $        13,596 $        37,072 $        57,231

Detailed workings of the cloud-based system:

For calculating the number of employees from decimal to integer we have used round down function in excel (as it is a more conservative approach)  

Cloud-based system for payroll processing
Particulars M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Year 1 M13 M14 M15 M16 M17 M18 M19 M20 M21 M22 M23 M24 Year 2 M25 M26 M27 M28 M29 M30 M31 M32 M33 M34 M35 M36 Year 3 Total
Variable-rate applicable 14 14 14 14 13 13 13 13 13 13 13 13 13 13 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11
No. of Employees 15.0 16.5 18.2 20.0 22.0 24.2 26.6 29.2 32.2 35.4 38.9 42.8 47.1 51.8 57.0 62.7 68.9 75.8 83.4 91.7 100.9 111.0 122.1 134.3 147.7 162.5 178.8 196.6 216.3 237.9 261.7 287.9 316.7 348.4 383.2 421.5
Flat rate 200 200 200 200 200 200 200 200 200 200 200 200 $        2,400 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $          2,400 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $        200 $          2,400 $          7,200
Per Employee Per month rate 210 224 252 266 273 312 338 377 416 455 494 546 $        4,163 $        611 $        663 $        616 $        682 $        748 $        825 $        913 $    1,001 $    1,100 $    1,221 $    1,342 $    1,474 $        11,196 $    1,617 $    1,782 $    1,958 $    2,156 $    2,376 $    2,607 $    2,871 $    3,157 $    3,476 $    3,828 $    4,213 $    4,631 $        34,672 $        50,031
Total $        410 $        424 $          452 $        466 $        473 $        512 $        538 $        577 $        616 $        655 $        694 $        746 $        6,563 $        811 $        863 $        816 $        882 $        948 $    1,025 $    1,113 $    1,201 $    1,300 $    1,421 $    1,542 $    1,674 $        13,596 $    1,817 $    1,982 $    2,158 $    2,356 $    2,576 $    2,807 $    3,071 $    3,357 $    3,676 $    4,028 $    4,413 $    4,831 $        37,072 $        57,231

It is a better choice to outsource the payroll processing service to the cloud service provider rather than maintain its own payroll system considering the above comparison.

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Answer #3

Answer is given below

Excel modelling with if formula has been developed for changes to estimates for the number of employees

For Excel modelling screen shot is given below

Number of employees have been rounded upwards in calculation.

Purchase cost Software Hardware $12,000 $10,000 $22,000 Upgrade cost Software Hardware IT staff Per month Total months Total

Excel modelling Month 10% increase Employees Total cost =B26+1 =B27+1 =B28+1 =B29+1 =B30+1 =B31+1 =B32+1 =B33+1 =B34+1 =B35+1

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Answer #2

M. Purchasing and maintaining Payroll System Service from the Cloud Provider Costs Costs 12000 10000 43200 Particulars Costs

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