Question

luStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows:

	Administration			Accounting			Domestic			International
Employees		—			25			15			60
Transactions		50,000			—			10,000			40,000
Department direct costs	$	68,000		$	24,500		$	154,000		$	597,000

BluStar estimates that the cost structure in its operations is as follows:

	Administration			Accounting			Domestic			International
Variable costs	$	24,500		$	5,500		$	115,000		$	431,000
Fixed costs		43,500			19,000			39,000			166,000
Total costs	$	68,000		$	24,500		$	154,000		$	597,000
Avoidable fixed costs	$	11,250		$	3,300		$	22,500		$	111,500

Required:

a. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.)

Maximum Amount

b. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.)

Maximum Amount

c. If BluStar outsources both the Administration and the Accounting Departments, what is the maximum it can pay an outside vendor without increasing total costs?

Maximum Amount

Answer 1

(a) If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs:-

Variable Cost of Administration	$24500
Avoidable fixed costs of Administration	$11250
Variable cost of Accounting ($5500 * 50000/100000)	$2750
Maximum Amount	$38500

(b) If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs:-

Variable Cost of Accounting	$5500
Avoidable fixed costs of Accounting	$3300
Variable cost of Administration ($24500 * 25/100)	$6125
Maximum Amount	$14925

(c) If BluStar outsources both the Administration and the Accounting Departments, what is the maximum it can pay an outside vendor without increasing total costs:-

Variable Cost of Administration	$24500
Variable Cost of Accounting	$5500
Maximum Amount	$30000