Question

SPRINT , Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows total costs for each manufacturing facility and for each support department.

Total Costs by Department (in thousands)
Information technology (IT)	$ 2,000
Human resources (HR)	1,000
Clothing	$10,000
Shoes	$8,000
Total costs	$24,000

The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) based on the following Data and  bases, as below:

Information technology:     Number of IT labor hours worked by department

Human resources:             Number of employees supported by department

Department	IT Hours Used	Number of Employees
Clothing	5,000	120
Shoes	3,000	40
Information technology	-	40
Human resources	2,000	-

Required

1. Allocate the cost of the support department (of information technology and human resources) to the operating department (clothing and shoes using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the reciprocal method?

2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Spirit Training no longer operated its own IT department, 30% of the costs of the IT department could be eliminated. Should Spirit outsource its IT services?

Answer 1