Reference no: EM131191449

Problem 1 : Reciprocal Cost Allocation-Outsourcing a Service Department
Refer to the facts in Problem 1. Cost records obtained from Farmington Components show the following cost structure in their departments:

	Engineering	Administration	Maintenance	Fabrication	Assembly
Variable costs	$100,000	$320,000	$130,000	$700,000	$380,000
Fixed costs	100,000	630,000	120,000	1,050,000	120,000
Total costs	$200,000	$950,000	$250,000	$1,750,000	$500,000
Avoidable
fixed costs	$ 70,000	$400,000	$ 70,000	$ 912,500	$ 75,000

Required
a.If Farmington outsources the Engineering Department, what is the maximum they can pay an outside vendor without increasing total costs?

b.If Farmington outsources the Administration Department, what is the maximum they can pay an outside vendor without increasing total costs?

c.If Farmington outsources the Maintenance Department, what is the maximum they can pay an outside vendor without increasing total costs?

Problem 2 : Cost Allocation: Step and Reciprocal Methods
Farmington Components has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded:

Supplying		Using Department
Department	Engineering	Administration	Maintenance	Fabrication	Assembly
Engineering	-0-	50%	-0-	10%	40%
Administration	20%	-0-	10%	50%	20%
Maintenance	-0-	20%	-0-	30%	50%
Direct cost	$200,000	$950,000	$250,000	$1,750,000	$500,000

Required:

Allocate the service department costs to the two operating departments using the reciprocal method.