Question

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

	Maintenance			Personnel			Printing			Developing
Machine-hours		—			1,000			1,000			3,000
Labor-hours		500			—			500			2,000
Department direct costs	$	16,000		$	38,750		$	49,100		$	31,000

University Printers estimates that the variable costs in the Personnel Department total $18,500 and in the Maintenance Department variable costs total $7,800. Avoidable fixed costs in the Personnel Department are $6,300.

Required:

If University Printers outsources the Personnel Department functions, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.)

Answer 1

Variable cost of the maintenance department per hour = Variable cost of the maintenance department / Total machine hours

= $7800/5000

= $1.56

Variable cost assigned to personnel department =1.56*1000 =$1560

Avoidable cost includes variable cost and avoidable fixed cost.

Variable cost                                         $18500

Maintenance departments saved cost $1560

Avoidable fixed cost $6800

Total                                                       $26860

Maximum it can pay an outside vendor without increasing total costs = $26860