Question

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	$	50
Direct labor		106
Variable overhead		32
Fixed overhead		94
Total	$	282

Trailblazers has offered to sell the assembly to Mobility for $220 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 $80,000.

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

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

	Make
	Buy

Answer 1

a
	Status Quo	Alternative	Difference
Trailblazers’ offer	0	440000	440000	higher
Materials	100000	0	100000	lower
Labor	212000	0	212000	lower
Variable overhead	64000	0	64000	lower
Fixed overhead applied	188000	108000	80000	lower
Total costs	564000	548000	16000	lower
b
Make, as cost savings is less than $20,000

Workings:
	Status Quo	Alternative
Trailblazers’ offer	0	=2000*220
Materials	=2000*50	0
Labor	=2000*106	0
Variable overhead	=2000*32	0
Fixed overhead applied	=2000*94	=188000-80000