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:

Question

Quizplus · Accepted Answer

The relevant costs in this outsourcing decision are the traceable variable costs ($80,000) and the portion of the corporate administrative overhead allocated to Maddox ($18,000). The fixed operating costs are also relevant, but because they will be reduced by 70%, only the remaining 30% of the fixed costs ($7,500) are relevant.

Therefore, the total relevant costs are $80,000 + $18,000 + $7,500 = $105,500.

The irrelevant costs are the portion of the corporate administrative overhead that is not directly allocated to Maddox ($25,000), making the total irrelevant costs $25,500. Thus, the answer is D.

Maddox, a Division of Stanley Enterprises, Currently Performs Computer Services