Question

If university printers outsources the personnel department functions, what is the maximum they can pay an outside vendor without increasing total costs

Answer 1

Question:

The question is incomplete. Below is a likely question and the answer.

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

Maintenance Personnel Printing Developing

Machine-hours — 1,000 1,000 3,000

Labor-hours 500 — 500 2,000

Department $16,500 $39,750 $41,750 $33,000

University Printers estimates that the variable costs in the Personnel Department total $15,500 and in the Maintenance Department variable costs total $8,600. Avoidable fixed costs in the Personnel Department are $5,400.

If university printers outsources the personnel department functions, what is the maximum they can pay an outside vendor without increasing total costs.

Answer:

Maximum pay to an outside vendor = $20,900

Step-by-step explanation:

Given Data:

Avoidable fixed cost = $5,400

Avoidable variable cost = $15,500

The maximum pay to an outside vendor is calculated using the formula;

Maximum pay to an outside vendor = Avoidable variable cost + Avoidable fixed cost

Substituting, we have;

Maximum pay to an outside vendor = $15,500 + $5,400

=$20,900

Answer 2

$27,600

Step-by-step explanation:

The maximum amount that the university should pay must be equal to the variable costs of the personnel department. The department's total costs are $35,500 and the variable costs are $22,000 and the avoidable fixed costs are $5,600, so as long as the university pays up to $27,600 (= $22,000 + $5,600) to the outside vendor, then it will not have increased its total costs.

The fixed non-avoidable costs = $35,500 - $22,000 - $5,600 = $7,900 will remain regardless of what decision is made. If the university pays more than the variable costs and avoidable fixed costs, e.g. $28,000, then total costs would be $36,900 which results in a $400 increase.