The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows the total costs for each manufacturing facility and for each support department (in thousands):
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:
Information technology: Number of IT labor- hours worked by department
Human resources: Number of employees supported by department
1. What are the total costs of the production departments (clothing and shoes) after the support department costs of IT and HR have been allocated using
(a) The direct method,
(b) The step- down method (allocate IT first),
(c) The step- down method (allocate HR first), and
(d) The reciprocal method.
2. Assume that all of the work of the IT department could be outsourced to an independent company for $ 97.50 per hour. If Mountain Extreme no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Mountain Extreme outsource its IT services? What other factors besides cost should managers consider in this decision?