Reference no: EM132561976

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    $51,000                   $27,000                  $153,750                  $591,000

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

                                          Administration                Accounting                Domestic                    International

Variable costs                    $24,500                        $5,400                   $114,000               $432,000

Fixed costs                         26,500                          21,600                    39,750                   159,000

Total costs                           $51,000                       $27,000                        $153,750             $591,000

Avoidable fixed costs                   $9,250                        $3,700                        $24,500              $115,000

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?