Should sharon jones outsource its it services

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Reference no: EM131952482

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.

			Total costs by
($'000)	Variable	Fixed	department
	costs	costs	(in thousands)
Information technology (IT)	$ 1,200	$ 4,000	$ 5,200
Human resources (HR)	800	2,000	2,800
Clothing	5,000	16,000	21,000
Eyewear	6,000	9,000	15,000
Total costs	$13,000	$31,000	$44,000

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:

Department

Clothing

Eyewear

Information technology Human resources

IT hours used 6,000 4,000

2,000

Number of employees

200

110

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),

(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?

Reference no: EM131952482

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