The maintenance department's costs are allocated to other departments based on the number of hours...
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Accounting
The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.
The milling department is purchasing several new machines. They can purchase a service contract for $30,000 per year or turn down the service contract. If they dont have a service contract, they will require an additional 600 hours of service from the maintenance department.
Required:
a. What is the overhead application rate for the maintenance department?
b. What is the cost to the milling department of 600 hours of maintenance?
c. How much more (less) profit will the company have if they choose the service contract over maintenance from the maintenance department?
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