Question

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

	Maintenance	Personal	Printing	Developing
Machine-hours		1,000	1,000	3,000
Labor-hours	500		500	2,000
Department Direct Costs	15,000	36,250	44,900	28,500

University Printers estimates that the variable costs in the Personnel Department total $20,250 and in the Maintenance Department variable costs total $7,600. Avoidable fixed costs in the Personnel Department are $6,300.

Required:

If University Printers outsources the Personnel Department functions, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.)

Answer 1

Maximum pay to outside vendor will be equal to avoidable cost of personnel department.

So now avoidable cost includes -

Variable cost = 20,250

Maintainence department saved cost = 1,520

Avoidable fixed cost = 6,300

total = 28,070

Variable cost of the maintainence department = 7,600

Per hour variable cost of maintainence department = 7,600 / 5,000 (Total of machine hours)

= 1.52

Variable cost assigned to personnel department = 1000 * 1.52

= 1,520

It can be avoided in case of outsourcing the personnel department as it is variable.

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