Exam 3 - Practice Problems.pdf

# Should tc accept the offerno cost when outsourcing it

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Should T&C accept the offer?No Cost when outsourcing IT services Fixed Cost of IT services 400,000 Cost of IT services to Operating Dept. 14,000 × 20 = 280,000 Cost of IT services to the HR Dept. 3,500 × 45,000 × 20 60,000 = 52,500 direct variable cost of HR Dept. 200,000 × 45,000 60,000 = 150,000 direct fixed cost of HR Dept. 200,000 1,082,500 this is less than 700,000 + 400,000 = 1,100,000 Yes

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Exam 3 – Practice Problems Page 40 QUESTION: Carasco Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2007 is: Revenues \$680,000 Salaries of professional staff (8,000 hours @ \$50 per hour) 400,000 Travel 18,000 Administrative and support costs 160,000 Total costs 578,000 Operating income \$102,000 Following is the percentage of time spent by professional staff on various activities: Making calculations and preparing drawings for clients 75% Checking calculations and drawings 4 Correcting errors found in drawings (not billed to clients) 7 Making changes in response to client requests (billed to clients) 6 Correcting own errors regarding building codes (not billed to clients) 8 Total 100% Assume administrative and support costs vary with professional-labor costs. Required: Consider each requirement independently. 1. How much of the total costs in 2007 are value-added, nonvalue-added, or in the gray area in between? Explain your answers briefly. What actions can Carasco take to reduce its costs? 2. Suppose Carasco could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Carasco’s operating income. 3. Now suppose Carasco could take on as much business as it could complete, but it could not add more professional staff. Assume Carasco could eliminate all errors so that it does not need to spend any time correcting errors. Assume Carasco could use the time saved to increase revenues proportionately. Assume travel costs will remain at \$18,000. Calculate Carasco’s operating income.
Exam 3 – Practice Problems Page 41 SOLUTION: Classification of total costs into value-added, nonvalue-added, or gray areas in between: Doing calculations and responding to client requests for changes are value-added because customers perceive these costs as necessary for the service of preparing architectural drawings. Costs incurred on correcting errors in drawings and making changes because they were inconsistent with building codes are nonvalue-added. Customers do not perceive these costs as necessary and would be unwilling to pay for them. Carasco should seek to eliminate them by making sure all associates are well-informed regarding building code requirements and by improving the quality of drawings. Checking calculations and drawings is a gray area (some, but not all, checking may be needed), but may be regarded as value added by some (which will change the calculations above).

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