Reference no: EM132562167

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                   15                         60

Transactions                              50,000                                -                  10,000                    40,000

Department direct costs                $59,000                           $25,000                $154,750               $607,000

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

                                           Administration                   Accounting                      Domestic                International

Variable costs                        $26,500                       $6,500                      $113,000                 $431,000

Fixed costs                              32,500                        18,500                        41,750                176,000

Total costs                               $59,000                    $25,000                       $154,750                $607,000

Avoidable fixed costs                   $11,750                       $4,300                        $20,500             $114,500

Required:

Question a. If BluStar outsources the Administration Department, what is the maximum it can pay an outside vendor without increasing total costs?

Question b. If BluStar outsources the Accounting Department, what is the maximum it can pay an outside vendor without increasing total costs?

Question 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?