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 Machine-hours Labor-hours Department direct costs 500 $12,500 Personnel 1,000 - $35,250 Printing Developing 1,000 3,000 500 2,000 $41,400 $31,000 University Printers estimates that the variable costs in the Personnel Department total $19,750 and in the Maintenance Department variable costs total $8,400. Avoidable fixed costs in the Personnel Department are $5,400. 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.) Maximum Amount

Answer 1

Maximum amount can be paid to outside vendor will be equal to avoidable cost of personnel department.

Avoidable cost includes variable cost and avoidable fixed cost.

Variable cost                                         $19750

Maintenance departments saved cost 1680

Avoidable fixed cost $                            5400

Total                                                       $26830

Variable cost of the maintenance department = $8400

Per hour variable cost of the maintenance department= $8400/5000 hours (Total machine hours)

Per hour variable cost of the maintenance department= $1.68

Variable cost assigned to personnel department = 1.68 * 1000 =$1680

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