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 and 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. Required: a. Does Vroom s decision deal with excess supply or excess demand? b. How much would Vroom save (or lose) by making the part in-house?
