Kirby Industries is considering the possibility of outsourcing the activities of service department S1. In order to evaluate the bids from qualified vendors, Kirby's accountant provides the following revised data that reflect only the variable costs incurred.
|
Variable
|
|
Proportion of services provided to:
|
|
costs
incurred
|
Service
department
|
S1
|
S2
|
P1
|
P2
|
P3
|
|
$300,000
|
S1
|
-
|
20%
|
30%
|
40%
|
10%
|
|
104,000
|
S2
|
40%
|
-
|
20%
|
15%
|
25%
|
The avoidable fixed costs of running service department S1 are estimated to be $390,000.
Required:
Determine the possible cost savings from eliminating service department S