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.)

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

	Make
	Buy

Answer 1

Ans:

a

Particulars	Make ($)	Buy($)	Difference($)
Direct Material	100,000	0	100,000
Direct Labor	212,000	0	212,000
Variable Cost	64,000	0	64,000
Avoidable Fixed Cost	80,000	0	80,000
Purchase Cost		440000	(440000)
Total	456,000	440000	16,000

If the product is purchased from Trailblazers Inc. there would be a total saving of $16000.

*2000*50 = 100,000

*2000*106 = 212,000

*2000*32 = 64,000

*2000*220 = 440000

b. Buying the product is more beneficial to Mobility. However, as per the criteria set by the management, the net gain is less the $20000 hence the proposal to buy shall be rejected by the management.

Note:

Fixed cost is always Irrelevant for decision making

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