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Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm

Accounting

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.   some other amount.

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Answer D. $25,500

Allocated corporate administrative overhead + Unavoidable Fixed operating costs

Allocated corporate administrative overhead= $ 18,000

Unavoidable Fixed operating costs= 30% (100% -70% avoidable) of $25,000 = $7,500

Total irrelevant costs = $ 18,000 + $ 7,500 = $25,500

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