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Answer (D) is correct . Given that overhead is 40% fixed, $66,000 ($110,000 × 60%) is variable, and $44,000 is fixed. Of the latter amount, $25,000 is attributable to the supervisor’s salary. The $19,000 remainder is allocated from total company overhead and is unavoidable. Assuming the company will continue to pay the supervisor’s salary if an outside firm services the cafeteria, the total fixed overhead is not an avoidable (incremental) cost. Thus, the total avoidable cost of the cafeteria’s operation is $241,000 ($100,000 food + $75,000 labor + $66,000 VOH). This amount is the savings from hiring an outside firm. Accordingly, it is also the maximum that Laurel should be willing to pay the outside firm.

Answer (A) is incorrect because The amount of $285,000 is greater than the avoidable cost of operating the cafeteria.
Answer (B) is incorrect because The company can pay more than $175,000. Its overhead costs are avoidable.
Answer (C) is incorrect because The company can pay more than $219,000.