Reference no: EM132008573

Question - Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow:

Proportion of Services Used by

Department Direct Costs Maintenance Cafeteria Building A Building B

Building A $ 970,000

Building B 670,000

Maintenance 445,000 - 0.2 0.5 0.3

Cafeteria 325,000 0.8 - 0.1 0.1

Warren estimates that the variable costs in the Maintenance Department total $147,000, and in the Cafeteria variable costs total $170,000. Avoidable fixed costs in the Maintenance Department are $81,000.

Required: If Warren outsources the Maintenance Department, what is the maximum they can pay an outside vendor without increasing total costs?