Question
BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees,
BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows.
Administration | Accounting | Domestic | International | |||||||||
Employees | 25 | 15 | 60 | |||||||||
Transactions | 50,000 | 10,000 | 40,000 | |||||||||
Department direct costs | $ | 60,000 | $ | 23,000 | $ | 153,250 | $ | 597,000 | ||||
BluStar estimates that the cost structure in its operations is as follows.
Administration | Accounting | Domestic | International | |||||||||
Variable costs | $ | 25,500 | $ | 6,600 | $ | 113,000 | $ | 426,000 | ||||
Fixed costs | 34,500 | 16,400 | 40,250 | 171,000 | ||||||||
Total costs | $ | 60,000 | $ | 23,000 | $ | 153,250 | $ | 597,000 | ||||
Avoidable fixed costs | $ | 10,250 | $ | 4,200 | $ | 23,000 | $ | 111,500 | ||||
. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs?
b. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs?
c. If BluStar outsources both the Administration and the Accounting Departments, what is the maximum it can pay an outside vendor without increasing total costs?
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