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			Personnel			Printing			Developing
Machine-hours		—			1,000			1,000			3,000
Labor-hours		500			—			500			2,000
Department direct costs	$	12,000		$	35,750		$	41,750		$	31,000

University Printers estimates that the variable costs in the Personnel Department total $16,250 and in the Maintenance Department variable costs total $8,700. Avoidable fixed costs in the Personnel Department are $5,200.

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

Solution:

On the off chance that administration would prefer not to build the aggregate cost then greatest sum can be paid to outside merchant will be equivalent to avoidable expense of staff office.

Avoidable cost includes variable cost and avoidable fixed cost.

Details	Amount($)
Variable cost	$16,250
Avoidable fixed cost	$5,200
Maintenance departments saved cost	$725
Total	$22,175

Variable cost of the maintenance department = $8,700

Per hour variable cost of the maintenance department = $8,700 / 12,000 hours (Total machine hours)

Per hour variable cost of the maintenance department = 0.725

Variable cost assigned to personnel department = 0.725 * 1000 = $725

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