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 $141,000, and in the Cafeteria variable costs total $169,000. Avoidable fixed costs in the Maintenance Department are $86,000. Required: If Warren outsources the Maintenance Department, what is the maximum they can pay an outside vendor without increasing total costs?

Explanation / Answer

If warren decides to outsource the maintainable department without increasing total costs, they should be paying maximum $ 141000 as it is the variable cost and if they decide to outsource the activity, variable cost is the cost that can be reduced. Fixed costs however are unavoidable.

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