Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Vroom Inc. manufactures motorcycles. The company is currently buying 20,000 units annually of a critical part that it needs from an outside supplier at $150

Vroom Inc. manufactures motorcycles. The company is currently buying 20,000 units annually of a critical part that it needs from an outside supplier at $150 per unit. In addition, Vroom spends $250,000 in fixed costs annually to coordinate with this supplier. The company is now considering making this part in-house. It has the needed machinery in its existing plant that is idling currently and can be used to produce this part. The variable cost per part including labor, materials, and variable overhead costs is estimated to be $90. The company allocates fixed overhead costs to various departments. Calculations show that each part would be charged a fixed overhead of $15. If the company decides to make the part, it would save the $250,000 in coordination costs with the supplier, but it would incur an annual fixed cost of $100,000 for running the department that would be in charge of making this part.

Vroom would save $1350000 by making the part in-house.

Why is the fixed overhead charge not relevant for this decision?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Solution Fixed overhead charge not relevant for this decisio... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Horngrens Cost Accounting A Managerial Emphasis

Authors: Srikant M. Datar, Madhav V. Rajan

16th edition

134475585, 978-0134475998, 134475992, 978-0134475585

More Books

Students also viewed these Accounting questions

Question

Costs of abnormal spoilage are losses. Explain

Answered: 1 week ago