Warren Ltd. has two production departments, Building A and Building B, and two s

Question

Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow: Warren estimates that the variable costs in the maintenance Department total $137,000, and in the Cafeteria variable costs total $161,00. Avoidable fixed costs in the Maintenance Department are $95,000. If Warren outsources the Maintenance Department, what is the maximum they can pay on outside vendor without increasing total costs? (Do not round your fractions. Round other intermediate dollars & final answer to the nearest dollar amount.)

Explanation / Answer

TOTAL VARIABLE COST OF MAINTANCE DEPT.

$137000 + 0.8 OF CAFETERIA

TOTAL VARIABLE COST OF CAFETERIA

$161000 + 0.2 OF MAINTANCE

SOLVING THE EQUATION,

$137000 + 0.8 ($161000 + 0.2 OF MAINTANCE)

$137000 + $128800 + 0.16 OF MAINTANCE

0.16 OF MAINTANCE = $265800

MAINTANCE = $1661250

TOTAL VARIABLE COST OF MAINTANCE DEPT. IS $1661250

MAXIMUM AMOUNT THEY CAN PAY AN OUTSIDE VENDOR

= VARIABLE COST + AVOIDABLE FIXED COST

= $1661250 + $95000

= $1756250

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