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