Service Costs/Outsourcing Eagle’s Crest Design is an interior design firm that specializes in hotel interior decorating....
Service Costs/Outsourcing
Eagle’s Crest Design is an interior design firm that specializes in hotel interior decorating. The design firm consists of two distinct services: Sketching and Installation. There are also support functions for the Eagle’s Crest Design that are separated into two departments: Office and Technology Support. Office encompasses all the expenses associated with the office support necessary to run the business. Technology Support includes any expenses associated with the computer systems required to operate the business as well as those used to sketch and install the designs. Cost data for the services and the support functions are as follows:
| Technology Support | $21,000 |
| Office | $16,000 |
| Sketching | $46,695 |
| Installation | $60,305 |
| Total | $144,000 |
The Office and Technology Support costs are allocated based on the service hours. The departments receive the following percentage of service hours from the departments:
| Department rendering service | Technology Support | Office | Sketching | Installation |
| Technology Support | -- | 15% | 45% | 40% |
| Office | 40% | -- | 25% | 35% |
1. Using the direct method, what is the dollar value of Technology Support allocated to Sketching?
2. Using the direct method, what is the dollar value of Office allocated to Sketching?
3. The direct method:
Group of answer choices
A. Considers the interrelation between Technology Support and Office
B. Considers that Technology Support services Office, but NOT that Office services Technology support
C. Considers that Office support services Office, but NOT that Technology Support services Office
D. Does NOT consider the interrelation between Technology Support and Office
4. Using the step-down method, where you allocate the costs of the Technology Support department first, what is the amount of total cost (from both service departments) allocated to Sketching?
5. Using the step-down method, where you allocate the costs of the Technology Support department first:
Group of answer choices
a. Considers the interrelation between Technology Support and Office
b. Considers that Technology Support services Office, but NOT that Office services Technology support
c. Considers that Office support services Office, but NOT that Technology Support services Office.
d. Does NOT consider the interrelation between Technology Support and Office.
6. Assume that all of the costs in this problem are variable. Also, assume that the Technology support department cost included 1,000 hours (you paid them a rate of $21/hour). What is the maximum hourly rate bid you would accept from a third party? (Note: only consider the costs and factors presented in this problem).
7. Assume that $10,500 of the Technology Support cost referenced above were fixed and could not be eliminated if you were to outsource all 1,000 hours of Technology Support. Assuming that everything else is the same, the hourly rate bid you would accept from a third party would
a increase
b decrease
c remain the same
Homework Answers
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| Eagle’s Crest Design | |||||
| Direct Method | Technology Support | Office | Sketching | Installation | Total |
| Services provided by Technology Support | 15.00% | 45.00% | 40.00% | 100.00% | |
| Services provided by Office | 40.00% | 25.00% | 35.00% | 100.00% | |
| Costs Incurred | 21,000.00 | 16,000.00 | 46,695.00 | 60,305.00 | 144,000.00 |
| Allocation of Technology Support costs (45:40) | (21,000.00) | - | 11,117.65 | 9,882.35 | - |
| Allocation of Office costs (25:35) | - | (16,000.00) | 6,666.67 | 9,333.33 | - |
| Total budgeted cost of operating departments | - | - | 64,479.31 | 79,520.69 | 144,000.00 |
| Answer 1 |
| So, the value of Technology Support allocated to Sketching is $ 11,117.65. |
| Answer 2 |
| So, the value of Office allocated to Sketching is $ 6,666.67. |
| Answer 3: The direct method: |
| D. Does NOT consider the interrelation between Technology Support and Office |
| Step Down Method | Technology Support | Office | Sketching | Installation | Total |
| Services provided by Technology Support | 15.00% | 45.00% | 40.00% | 100.00% | |
| Services provided by Office | 40.00% | 25.00% | 35.00% | 100.00% | |
| Rank | Rank 1 | Rank 2 | |||
| Costs Incurred | 21,000.00 | 16,000.00 | 46,695.00 | 60,305.00 | 144,000.00 |
| Allocation of Technology Support costs (15:45:40) | (21,000.00) | 3,150.00 | 9,450.00 | 8,400.00 | - |
| Total costs | - | 19,150.00 | 56,145.00 | 68,705.00 | 144,000.00 |
| Allocation of Office costs (25:35) | - | (19,150.00) | 7,979.17 | 11,170.83 | - |
| Total budgeted cost of operating departments | - | - | 64,124.17 | 79,875.83 | 144,000.00 |
| 17,429.17 |
| Answer 4 |
| The amount of total cost (from both service departments) allocated to Sketching is $ 17,429.17. |
| Answer 5 |
| b. Considers that Technology Support services Office, but NOT that Office services Technology support. |
| Answer 6 |
| If all of the costs in this problem are variable and Technology support hourly rate is $ 21 then the maximum hourly rate bid to be accepted from a third party is $ 21. |
| Answer 7 |
| If $ 10,500 is fixed then to keep the total cost of Technology support to be same the hourly rate bid to accept from a third party would |
| b. decrease |
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