Sharon Jones, Inc. manufactures clothing and eyewear for professional women. The company has two product lines (clothing and eyewear), 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 total costs for each manufacturing facility and for each support department.
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Total costs by
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($'000)
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Variable
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Fixed
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department
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costs
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costs
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(in thousands)
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Information technology (IT)
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$ 1,200
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$ 4,000
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$ 5,200
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Human resources (HR)
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800
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2,000
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2,800
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Clothing
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5,000
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16,000
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21,000
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Eyewear
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6,000
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9,000
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15,000
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Total costs
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$13,000
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$31,000
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$44,000
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The total costs of the support departments (IT and BR) are allocated to the production departments (clothing and eyewear) using a single rate based on the following:
Information technology: Number of IT labour-hours worked by department
Human resources: Number of employees supported by department
Data on the bases, by department, are given as follows:
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Department
Clothing
Eyewear
Information technology Human resources
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IT hours used 6,000 4,000
2,000
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Number of employees
200
90
110
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Required:
a Calculate the total costs of the production departments (clothing and eyewear) after the support department costs of information technology and human resources have been allocated using
(a) the direct method,
(b) the step-down method (allocate information technology first),
(c) the step-down method (allocate human resources first), and
(d) the reciprocal method.
b. Assume that all of the work of the IT department could be outsourced to an independent company for $195 per hour. If Sharon Jones no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sharon Jones outsource its IT services?