30.03.2023 - 11:36

Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consulta

Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Traceable variable and fixed operating costs total $80,000 and $25,000, respectively, in addition to $18,000 of corporate administrative overhead allocated from Stanley. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%.

The irrelevant costs in Maddox’s outsourcing decision total:

A. $17,500

B. $18,000

C. $25,000

D. $25,500

E. $105,500

Answers (1)
  • doggyb
    April 2, 2023 в 08:20

    The relevant costs in Maddox's outsourcing decision are the costs that will change as a result of the decision. In this case, the relevant costs are the traceable variable costs, which will no longer be incurred if Maddox outsources the service, and the 30% of fixed operating costs that will still be incurred after the outsourcing decision.

    Therefore, the irrelevant costs are the remaining 70% of fixed operating costs that will be eliminated if Maddox outsources the service and the allocated corporate administrative overhead, which is a sunk cost and will not change with the decision.

    Given the information provided, the total fixed operating costs are $25,000, and 70% of this will be eliminated if Maddox outsources the service, so the irrelevant costs are $7,500 (70% x $25,000).

    The allocated corporate administrative overhead of $18,000 is also irrelevant, as it is a sunk cost and will not change with the outsourcing decision.

    Therefore, the total irrelevant costs are $7,500 + $18,000 = $25,500.

    Thus, the correct answer is option D, $25,500.

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