Question

If you could show all your work it would be greatly appreciated!

Sportz, 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.

	Variable Cost	Fixed Cost	Total Costs by Department
Information Tech.	600	2,000	2,600
Human Resources	400	1,000	1,400
Clothing	2,500	8,000	10,500
Shoes	3,000	4,500	7,500
Total Costs	6,500	15,500	22,000

The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:

Information technology: Number of IT labor-hours worked by department
Human resources: Number of employees supported by department

Data on the bases, by department, are given as follows:

Department		IT Hours Used		Number of Employees
Clothing		5,040		220
Shoes		3,960		88
Information technology		-		92
Human resources		3,000		-

What are the total costs of the production departments (clothing and shoes) after the support department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method?

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

Answer 1