Problem 7-36 Departmental Cost Allocation; Outsourcing (LO 7-3, 7-4] [The following information applies to the questions displayed below.] McKeoun Enterprises is a large machine tool company now experiencing alarming increases in maintenance expense in each of its four production departments. Maintenance costs are currently allocated to the production departments on the basis of direct labor hours incurred in the production department. To provide pressure for the production departments to use less maintenance, and to provide an incentive for the maintenance department to become more efficient, McKeoun has decided to investigate new methods of allocating maintenance costs. One suggestion now being evaluated is a form of outsourcing. The producing departments could purchase maintenance service from an outside supplier. That is, they could choose either to use an outside supplier of maintenance or to be charged an amount based on their use of direct labor hours. The following table shows the direct labor hours in each department, the allocation of maintenance cost based on labor hours, and the cost to purchase the equivalent level of maintenance service from an outside maintenance provider. Cost Allocation Direct Labor Hours Based on Direct Labor Production Allocation Base Outside Price Department (Percent) 20% Hours $ 88,400 132,600 44,200 176,800 $113,000 90,400 67,800 180,800 30 15 C 35 $442,000 $452,000 100% Total Part 2 2. If McKeoun follows the proposed plan, what is likely to happen to the use of internally-provided maintenance compared to externally-provided maintenance? How will each department manager be motivated to increase or decrease the use of maintenance? What will be the overall effect of going to the new plan? Problem 7-36 Departmental Cost Allocation; Outsourcing (LO 7-3, 7-4] [The following information applies to the questions displayed below.] McKeoun Enterprises is a large machine tool company now experiencing alarming increases in maintenance expense in each of its four production departments. Maintenance costs are currently allocated to the production departments on the basis of direct labor hours incurred in the production department. To provide pressure for the production departments to use less maintenance, and to provide an incentive for the maintenance department to become more efficient, McKeoun has decided to investigate new methods of allocating maintenance costs. One suggestion now being evaluated is a form of outsourcing. The producing departments could purchase maintenance service from an outside supplier. That is, they could choose either to use an outside supplier of maintenance or to be charged an amount based on their use of direct labor hours. The following table shows the direct labor hours in each department, the allocation of maintenance cost based on labor hours, and the cost to purchase the equivalent level of maintenance service from an outside maintenance provider. Cost Allocation Direct Labor Hours Based on Direct Labor Production Allocation Base Outside Price Department (Percent) 20% Hours $ 88,400 132,600 44,200 176,800 $113,000 90,400 67,800 180,800 30 15 C 35 $442,000 $452,000 100% Total Part 2 2. If McKeoun follows the proposed plan, what is likely to happen to the use of internally-provided maintenance compared to externally-provided maintenance? How will each department manager be motivated to increase or decrease the use of maintenance? What will be the overall effect of going to the new plan