Question

BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows. Administration Accounting Domestic International Employees — 25 15 60 Transactions 50,000 — 10,000 40,000 Department direct costs $ 57,000 $ 29,000 $ 158,250 $ 602,000 BluStar estimates that the cost structure in its operations is as follows. Administration Accounting Domestic International Variable costs $ 22,500 $ 5,100 $ 113,500 $ 435,000 Fixed costs 34,500 23,900 44,750 167,000 Total costs $ 57,000 $ 29,000 $ 158,250 $ 602,000 Avoidable fixed costs $ 11,500 $ 4,400 $ 23,000 $ 113,500 Required: a. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs? b. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs? c. If BluStar outsources both the Administration and the Accounting Departments, what is the maximum it can pay an outside vendor without increasing total costs?

Answer 1

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Blue Star
Answer a	Administration Department
Variable costs	22,500.00
Avoidable fixed costs	11,500.00
Maximum payment to an outside vendor	34,000.00
Answer b	Accounting Department
Variable costs	5,100.00
Avoidable fixed costs	4,400.00
Maximum payment to an outside vendor	9,500.00
Answer c	Administration Department	Accounting Department	Total
Variable costs	22,500.00	5,100.00	27,600.00
Avoidable fixed costs	11,500.00	4,400.00	15,900.00
Maximum payment to an outside vendor	34,000.00	9,500.00	43,500.00