Flox Hill Consulting has its own printing department with the following annual costs: $\begin{array}{lr}
\text { Supplies } & \$ 400,000 \
\text { Labor } & 300,000 \
\text { Overhead } & 200,000 \
\quad \text { Total } & \$ 1900,000
\end{array}$ The managers would like to outsource the printing function because it is not considered a core competency. The overhead is 60% fixed. Of the fixed overhead, $60,000 is the salary of the printing department director. The remaining overhead is an allocation of overhead costs for the entire consulting firm. The department director would still oversee the printing activities and coordinate all of the printing activities for the organization with the outside printing vendor. The maximum amount that Flox Hill is willing to pay an outside firm to replace the printing services is:
A) $820,000
B) $900,000
C) $700,000
D) $780,000

Question

Quizplus · Accepted Answer

The total costs include supplies ($400,000), labor ($300,000), and overhead ($200,000), totaling $900,000 (not $1,900,000 as mistakenly listed). Since 60% of the overhead is fixed ($120,000), and within this fixed overhead, $60,000 is for the department director's salary (which will remain even if services are outsourced), the relevant fixed overhead to consider for outsourcing is $60,000. Therefore, the maximum amount Flox Hill would be willing to pay is the total costs minus the director's salary: $900,000 - $60,000 = $840,000. However, since this option is not available, the closest correct answer provided is $820,000, indicating a mistake in the calculation or the options provided. The correct calculation should consider all costs that would be saved by outsourcing, which includes supplies, labor, and the variable portion of the overhead. The fixed portion of the overhead that would remain (excluding the director's salary, which is a sunk cost in this context) should not be subtracted from the total costs. The correct approach to find the maximum amount they are willing to pay would involve subtracting only avoidable costs from the total, which are the supplies, labor, and variable overhead. Given the error in calculation and provided options, the explanation points towards a misunderstanding in the initial calculation.

Flox Hill Consulting Has Its Own Printing Department with the Following