Exercise 11-39 (Algo) Reciprocal Cost Allocation-Outsourcing a Service Department (LO 11-4, 5) Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow: Department Machining Assembly Maintenance Cafeteria Direct Costs $150,000 65,000 35,000 35,000 Proportion of Services Used by Maintenance Cafeteria Machining Assembly Maximum Amount 0.8 0.2 0.5 0.1 0.3 0.1 Caro estimates that the variable costs in the Maintenance Department total $11,000, and in the Cafeteria variable costs total $19,000. Avoidable fixed costs in the Maintenance Department are $8,000. Required: If Caro outsources the Maintenance Department, what is the maximum it can pay an outside vendor without increasing total costs? (Do not round intermediate calculations.)

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyz…