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Required Information

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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

elther 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.

Required:

$1.$ As a first step in moving to the outsourcing approach, McKeoun is considering an allocation based on the price

of the outside maintenance supplier for each department. Calculate the cost allocations on this basis and

compare

$2.$ 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?re them to the current direct labor hours basis.