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 1,800 units):

Direct materials	$	27
Direct labor		109
Variable overhead		15
Fixed overhead		41
Total	$	192

Trailblazers has offered to sell the assembly to Mobility for $163 each. The total order would amount to 1,800 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 $39,550.

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.)

Answer 1

Answer:

	Status Quo	Alternative	Difference
Trailblazers’ offer	$0	(1,800 units * $163) = $293,400	$293,400	higher
Materials	(1,800 units * $27) = 48,600	0	48,600	lower
Labor	(1,800 units * $109) = 196,200	0	196,200	lower
Variable overhead	(1,800 units * $15) = 27,000	0	27,000	lower
Fixed overhead applied	(1,800 units * $41) = 73,800	(1,800 units * $41) - $39,550 = 34,250	39,550	lower
Total costs	$345,600	$327,650	$17,950	lower

Conclusion: Mobility Partners should make rear wheel assemblies.

Reason: The saving is just $17,950 which is less than the minimum saving of $20,000.