University Printers has two service departments (Maintenance and Personnel) and

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:

University Printers estimates that the variable costs in the Personnel Department total $15,250 and in the Maintenance Department variable costs total $9,100. Avoidable fixed costs in the Personnel Department are $5,100.

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.)

Maintenance Personnel Printing Developing Machine-hours — 1,000 1,000 3,000 Labor-hours 500 — 500 2,000 Department direct costs $ 14,000 $ 39,750 $ 41,400 $ 33,000

Explanation / Answer

Total machine hours=5000

Personal department=1000

Ratio=1/5

Total labour hour=3000

Maintenance =500

Ratio=1/6

Total service department cost=direct cost of the service department+cost allocated to service department

Maintenance S1=$9,100+1/6*S2

Personal S2=$15,250+1/5 * S1

S2=$15,250+1/5*(9100+(1/6 ) S2)

S2=$15,250+$1820+1/30 S2

29/30 S2 =$17,070

S2=$17070×30/29

S2=$17,659

Avoidable cost from outsourcing personal=avoidable fixed cost+avoidable variable cost

=$5,100+$17,659

=$22,759

Total maximum amount=$22,759

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