BluStar Company has two service departments, Administration and Accounting, and
ID: 2342545 • Letter: B
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:
BluStar estimates that the cost structure in its operations is as follows:
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?
Administration Accounting Domestic International Employees — 25 15 60 Transactions 50,000 — 10,000 40,000 Department direct costs $ 54,000 $ 26,500 $ 159,250 $ 596,000Explanation / Answer
Variable costs $27,500
Avoidable fixed costs $11,750
Maximum can be paid $39,250
======
Variable costs $5,500
Avoidable fixed costs $3,800
Maximum can be paid $9,300
======
Administration
Accounting
Total
Variable costs
$27,500
$11,750
$39,250
Avoidable fixed costs
$5,500
$3,800
$9,300
Maximum can be paid
$33,000
$15,550
$48,550
The maximum it can pay an outside vendor without increasing total costs is $48,550.
Administration
Accounting
Total
Variable costs
$27,500
$11,750
$39,250
Avoidable fixed costs
$5,500
$3,800
$9,300
Maximum can be paid
$33,000
$15,550
$48,550