Question

Great Eastern Credit Union (GECU) has two operating departments (Branches and Electronic) and three service departments (Processing, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded:

Supplying Department	Using Department
	Processing				Administration				Maintenance				Branches				Electronic
Processing		0				50	%			0				10	%			40	%
Administration		0				0				0				60	%			40	%
Maintenance		10	%			20	%			0				20	%			50	%
Direct cost	$	93,000			$	560,000			$	281,000			$	4,250,000			$	2,450,000

The cost accountant at Great Eastern Credit Union estimates that the cost structures in its departments are as follows:

	Processing				Administration				Maintenance				Branches				Electronic
Variable costs	$	63,000			$	157,000			$	130,000			$	1,800,000			$	1,250,000
Fixed costs		30,000				403,000				151,000				2,450,000				1,200,000
Total costs	$	93,000			$	560,000			$	281,000			$	4,250,000			$	2,450,000
Avoidable fixed costs	$	9,000			$	283,000			$	77,000			$	690,000			$	600,000

a. If GECU outsources the Processing Department, what is the maximum it can pay an outside vendor without increasing total costs?

b. If GECU outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs?

c. If GECU outsources the Maintenance Department, what is the maximum it can pay an outside vendor without increasing total costs?

Thank you for your help!

Answer 1

a. If GECU outsources the Processing Department, maximum cost it can pay an outside vendor is as follows:

Variable Cost $ 63,000

Add: Avoidable fixed cost $ 9,000

Maximum amount that can be payable to outside vendor $ 72,000

b. If GECU outsources the Administration Department, maximum cost it can pay an outside vendor is as follows:

Variable Cost $ 157,000

Add: Avoidable fixed cost $  283,000

Maximum amount that can be payable to outside vendor $ 4,40,000

b. If GECU outsources the Maintenance Department, maximum cost it can pay an outside vendor is as follows:

Variable Cost $ 130,000

Add: Avoidable fixed cost $  281,000

Maximum amount that can be payable to outside vendor $ 4,11,000