Question

Caro estimates that the variable costs in the Maintenance Department total $11,000, and in the Cafeteria variable costs total $17,000. Avoidable fixed costs in the Maintenance Department are $5,000. Required: If Caro outsources the Maintenance Department, what is the maximum it can pay an outside vendor without increasing total costs

Answer 1

Answer:

If Caro outsources only the Maintenance department, she should pay not more than $11,000, the avoidable Fixed Costs is incidental to her operations and not that of the outsource partner thus the $5,000 shouldn't be included as a payment due the Outsource Partner.

Caro decision case

Maintenance department total costs:

Variable - $11,000

Avoidable fixed costs - $5,000

Total costs (if not outsourced) = $16,000

Explanation: