Ming Tai Manufacturing Company (Ming Tai) manufactures hydraulic machinery. The company has two services departments - the I.T. Department and the Purchasing Department. The departments are serving the two production departments in the company – the Machining Department and the Assembly Department. The work done in the I.T. Department is measured by the direct labour-hours of information technology support works. The work done in Purchasing Department is measured by the number of materials purchase order. The budgeted costs of the two service departments for 2020 are as follow:

	I.T. Department $	Purchasing Department $
Variable indirect labour and indirect materials costs	460,000	200,000
Salary of the department manager	180,000	100,000
Depreciation of machinery and equipment	200,000	60,000
Total	840,000	360,000

Depreciation of machinery and equipment is the straight-line depreciation in its 19th year of an estimated 25-year useful life. The distribution of each service department’s effort to the two production departments are as follow:

Used by

Served by	I.T. Department	Purchasing Department	Machining Department	Assembly Department
I.T. Department (Direct labour-hours)	0	800	2,000	1,200
Purchasing Department (Number of materials purchase order)	3,000	0	500	1,500

Required:

(a) Allocate the costs of the two services departments – I.T. and Purchasing, to the production departments – Machining and Assembly, using the following methods

i) the direct method;

ii) the step-down method (allocate I.T. Department first);

iii) the step-down method (allocate Purchasing Department first);

iv) the reciprocal method using linear equations.

(b) Ming Tai’s management has conducted a process reengineering study and discovered that all the works of the Purchasing Department could be outsourced. A third-party supply-chain service provider has offered to provide all the services of the present Purchasing Department for $35 per materials purchase order. If Ming Tai decides to outsource the services, all existing staff in the Purchasing Department will be transferred to other new positions in the company; and all the machine and equipment currently used in the Purchasing Department will be disposed with zero value. From a financial perspective only, should Ming Tai accept the offer? Explain.