Reciprocal Allocations The Rene Company has two main products, M-4 and M-5. Each is manufactured in a separate department. Two major service de- partments, power (P) and material-handling (H), support the plant activities. The energy crisis has prompted a careful analysis of all activities. The work of the service departments has been converted to “control-factor units of work used” and is distributed as follows for a typical period:

SUPPLIER USER [? H [> _ 80 H 60 —
M-4 production 80 40 M-5 production 60 80 Control-factor units 200 200 The costs of the service departments (before departments) for a typical period are:
any allocations to other P H Variable labor and material costs $14,000 $2,000 Supervision—fixed 2,000 2,000 Depreciation and other fixed 4,000 4,000 Reallocated costs from P > 23 i Oy Reallocated costs from H pide AD, : - 265,363,694 15,909,098 - What are the fully reallocated costs to M-4 and M-5? Allocate variable and fixed costs, using the reciprical method. Show and label all computations in an orderly way.
An outside power company has offered to supply all the power needed by the Rene Company and to provide all the services of the present power department. The cost will be $80 per control-factor unit. Should Rene accept?
Present a comparative analysis in three parts:

(a) yes or no;

(b) the total cost of the units acquired from the outside company; and

(c) the total variable costs if power were produced inside, assuming (perhaps unrealistically) for purposes of this analysis that only the variable costs are pertinent.
Base your decision on the quantitative data; ignore all qualitative and long run considerations.