Problem 11-65 (Static) Reciprocal Cost Allocation - Outsourcing a Service Department (LO 11-4, 5) 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. Administration Accounting Domestic International Employees 25 45 180 Transactions 25,000 20,000 80,000 Department direct costs $360,000 144,000 936,000 $3,600,000 BluStar estimates that the cost structure in its operations is as follows. Administration Accounting Domestic International Variable costs $150,000 36,000 678,000 $2,562,000 Fixed costs 210,000 108,000 258,000 1,038,000 Total costs $360,000 144,000 936,000 $3,600,000 Avoidable fixed costs $60,000 18,000 120,000 $675,000 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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 11-65 (Static) Reciprocal Cost Allocation - Outsourcing a Service Department (LO 11-4, 5)

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.

	Administration	Accounting	Domestic	International
Employees		25	45	180
Transactions	25,000		20,000	80,000
Department direct costs	$360,000	144,000	936,000	$3,600,000

BluStar estimates that the cost structure in its operations is as follows.

	Administration	Accounting	Domestic	International
Variable costs	$150,000	36,000	678,000	$2,562,000
Fixed costs	210,000	108,000	258,000	1,038,000
Total costs	$360,000	144,000	936,000	$3,600,000
Avoidable fixed costs	$60,000	18,000	120,000	$675,000

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?

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