Great Eastern Credit Union (GECU) has two operating departments (Branches and El
ID: 2390625 • Letter: G
Question
Great Eastern Credit Union (GECU) has two operating departments (Branches and Electronic) and three service departments (Processing, Administration, and Maintenance) During July, the following costs and service department usage ratios were recorded 50% 40% 60% 20% 10% 20% 50% Direct cost $94,000 $258,000 $4,850,000 The cost accountant at Great Eastern Credit Union estimates that the cost structures in its departments are as follows Variable costs Fixed costs Total costs Avoidable fixed costs $59,000 35,000 94,000 9,000 $159,000 411,000 $570,000 $131,000 $1,650,000 $1,500,000 3200,000800. 800,000 $258,000 $4,850,000 $2,300,000 S 84,000 620,000 690,000 21:000 3200000 Required a. If GECU outsources the Processing Department, what is the maximum it can pay an outside vendor without increasing total costs? b. If GECU outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs? c. If GECU outsources the Maintenance Department, what is the maximum it can pay an outside vendor without increasing total costs?Explanation / Answer
The maximum GECU can pay to outsource will be the total variable cost plus avoidable fixed costs. Because whether are not a department is outsouced fixed costs will continue to occur.
Hence, if GECU wants to outsource processing department , the maximum it can pay will be equal to 59000+9000=$68,000.
In case of administration department it will be 159000+285000=$4,44,000
In case of maintenance department, it will be 131000+84000=$ 2,15,000
Note: allocated fixed costs are irrelevant to decission making
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