Question

Part 1: Make or Buy Decisions

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          $          30       

Direct labor                             52       

Variable overhead                   21       

Fixed overhead                       52       

Total                             $           155   

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 $41,100.

Required:

a. Using Excel, prepare a schedule that shows the total differential costs. Indicate if the differential cost is higher, lower or no effect under the assumption that Status Quo is the base.

b. Should Mobility make rear wheel assemblies or buy them from Trailblazers? Why? Be sure to provide a complete justification for your decision.

Answer 1

Solution a:

Differential Analysis- Mobility Partner - Making rear wheel (alt 1) or Buying rear wheel (Alt2)
Particulars	Making Rear Wheel (Alt 1)	Buying Rear Wheel (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (2000*$110)	$0.00	$220,000.00	-$220,000.00
Direct material	$60,000.00	$0.00	$60,000.00
Direct Labor	$104,000.00	$0.00	$104,000.00
Variable overhead	$42,000.00	$0.00	$42,000.00
Avoidable Fixed Overhead	$41,100.00	$0.00	$41,100.00
Total Cost	$247,100.00	$220,000.00	$27,100.00

Solution b:

Mobility should buy Rear Wheels from Trailblazers as net financial advantage is greater than $20,000.