Question

Use the following information for the next 2 questions. Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Variable and fixed operating costs total $100,000 and $50,000, respectively. In addition, Stanley allocates $20,000 of corporate administrative overhead to Maddox. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%. 24. The irrelevant costs in Maddox's outsourcing decision total: 25. The relevant costs in Maddox's outsourcing decision total:

Answer 1

Variable operating costs = $100,000

Fixed operating costs = $50,000

Allocated corporate administrative overhead = $20,000

If outside consultant is used, Fixed operating costs would be reduced by (Avoidable Fixed operating costs) = 70%

= 50,000 x 70%

= $35,000

Unavoidable Fixed operating costs = 50,000 - 35,000

= $15,000

24.

Total irrelevant costs in Maddox's outsourcing decision = Unavoidable Fixed operating costs + Allocated corporate administrative overhead

= 15,000 + 20,000

= $35,000

25.

Total relevant costs in Maddox's outsourcing decision = Variable operating costs + Avoidable Fixed operating costs

= 100,000 + 35,000

= $135,000

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