At the start of the year, Vencor Company estimated manufacturing overhead to be $2,000,000. Eighty percent of the overhead is fixed and relates to depreciation of equipment. The remaining 20 percent is variable. The company estimated machine hours to be 100,000 and thus used a predetermined overhead rate of $20 per machine hour.
During the year, the company devised a new way to sequence movements of material among the machines, which resulted in a savings of 30,000 machine hours.
Required:
Estimate the amount of manufacturing overhead that the company would save related to the reduction in machine hours. Why is the savings less than $20 per machine hour?