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, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows. Employees Transactions Department direct costs Administration Accounting 25 50,000 $51,000 $20,500 Domestic 15 10,000 $ 158,750 International 60 40,000 $608,000 BluStar estimates that the cost structure in its operations is as follows. Variable costs Fixed costs Total costs Avoidable fixed costs Administration Accounting $ 28,000 $ 6,300 23,000 14,200 $ 51,000 $20,500 $ 11,000 $ 4,000 Domestic $111,500 47,250 $ 158,750 $ 19,500 International $430,000 178,000 $608,000 $114,000 Required: a. 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? Complete this question by entering your answers in the tabs below. Required A Required B Required C If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.) Maximum amount < Required A Required B

Answer 1

Solution A) - Outsourcing Administration Department Variable Costs $ 28,000 Avoidable fixed costs $ 11,000 $ 39,000 Therefore a total of $ 39,000 cost would be avoided if Admin department is outsourced hence, Maximum Amount $ 39,000 Solution B) - Outsourcing Accounting Department Variable Costs $ 6,300 Avoidable fixed costs $ 4,000 $ 10,300 Therefore a total of $ 10,300 cost would be avoided if Accounting department is outsourced hence, Maximum Amount $ 10,300 Solution C) - Outsourcing both Administration and Accounting Department Maximum Amount in A) $ 39,000 Maximum Amount in B) $ 10,300 Maximum Amount to pay outside $ 49,300

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