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	-	1000	1000	3000
Labor-hours	500	-	500	2000
Department direct hours	5000	12000	15000	10000

University Printers estimates that the variable costs in the Personnel Department total $7,000 and in the Maintenance Department variable costs total $3,000. Avoidable fixed costs in the Personnel Department are $4,000.

Required:

If University Printers outsources the Personnel Department functions, what is the maximum it can pay an outside vendor without increasing total costs?

Answer 1

	Maintenance	Personnel	Printing	Developing
Machine Hours	-	1000	1000	3000
Labor-hours	500	-	500	2000
Department direct hours	5000	12000	15000	10000
Allocaton of cost
	Printing	Developing	Total
Maintenance	750	2250	3000
	3000*1000/(1000+3000)	3000*3000/(1000+3000)
Personnel	1400	5600	7000
	7000*500/(500+2000)	7000*2000/(500+2000)
personnel department has variable cost of 7000 and avoidable fixed cost of 4000. Maximum cost which can be paid to vendor = 7000+4000 = $11000
hence, maximum 11000 can be paid with out impacting total cost.