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 $17,250 and in the Maintenance Department variable costs total $7,700. Avoidable fixed costs in the Personnel Department are $5,700.

Required:

If University Printers outsources the Personnel Department functions, what is the maximum it can pay an outside vendor without increasing total costs?

Maintenance Personnel Printing Developing Machine-hours — 1,000 1,000 3,000 Labor-hours 500 — 500 2,000 Department direct costs $ 13,000 $ 36,000 $ 43,850 $ 31,500

Explanation / Answer

Maximum pay to an outside vendor=Avoidable variable cost+Avoidable fixed cost Maximum pay to an outside vendor=17250+5700=$22950

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