Question

BluStar 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	$	54,000		$	26,500		$	159,250		$	596,000

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

	Administration			Accounting			Domestic			International
Variable costs	$	27,500		$	5,500		$	113,000		$	432,000
Fixed costs		26,500			21,000			46,250			164,000
Total costs	$	54,000		$	26,500		$	159,250		$	596,000
Avoidable fixed costs	$	11,750		$	3,800		$	18,000		$	114,000
a. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs? b. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs? 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?

Answer 1

1. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs?

Variable costs                          $27,500

Avoidable fixed costs               $11,750

Maximum can be paid           $39,250

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1. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs?

Variable costs                          $5,500

Avoidable fixed costs               $3,800

Maximum can be paid           $9,300

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

	Administration	Accounting	Total
Variable costs	$27,500	$11,750	$39,250
Avoidable fixed costs	$5,500	$3,800	$9,300
Maximum can be paid	$33,000	$15,550	$48,550

The maximum it can pay an outside vendor without increasing total costs is $48,550.