Question & Answer: Mobility Partners makes wheelchairs and other assistive devices. For years it has made the rear wheel assembly for its wheelchai…..

Mobility Partners makes wheelchairs and other assistive devices. For years it has made the rear wheel assembly for its wheelchairs. A local bicycle manufacturing firm, Trailblazers, Inc., offered to sell these rear wheel assemblies to Mobility. If Mobility makes the assembly, its cost per rear wheel assembly is as follows (based on annual production of 2,000 units):


Direct materials	$	28
Direct labor		53
Variable overhead		18
Fixed overhead		46
Total	$	145

Trailblazers has offered to sell the assembly to Mobility for $110 each. The total order would amount to 2,000 rear wheel assemblies per year, which Mobility’s management will buy instead of make if Mobility can save at least $20,000 per year. Accepting Trailblazers’s offer would eliminate annual fixed overhead of $39,800.

Required:

a. Prepare a schedule that shows the total differential costs. (Select option “higher” or “lower”, keeping Status Quo as the base. Select “none” if there is no effect.)

	Status Quo	Alternative	Difference
Trailblazers’ offer
Materials
Labor
Variable overhead
Fixed overhead applied
Total costs	$0	$0

b. Should Mobility make rear wheel assemblies or buy them from Trailblazers?

	Make
	Buy

Expert Answer


a)	Schedule of Differential costs
		Staus	alternative	differnece
		Quo
	Trailblazer’s offer		220,000	-220,000
	Materials	56000		56,000
	Labor	106000		106,000
	Variable overhead	36000		36,000
	fixed overhead deposted	92000	52200	39800
	total costs	290000	272,200	17,800


b)	Make since saving of $17,800 is less than demanded saving of $20,000

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