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 $25
Direct labor 53
Variable overhead 16
Fixed overhead 47
Total $141

Trailblazers 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 $10,000 per year. Accepting Trailblazers's offer would eliminate annual fixed overhead of $40,000.

Required:
a. Prepare a schedule that shows the differential costs on the 2,000 rear wheel assemblies order.
b. Should Mobility make rear wheel assemblies or buy them from Trailblazers?

Answer 1

Answer:

a. The preparation of schedule that shows the differential costs is shown below:-

b. Decision : Make

Explanation:

Particulars Make the  Buy from                      Differential      

                      Wheels          trailblazers           cost            

Offer of

trailblazer                            $220,000       $220,000    Higher

                                           (2,000 × $110)

Material cost  $50,000                               $50,000   Lower

                      ($25 × 2,000)

Labor cost      $106,000                              $106,000   Lower

                     ($53 × 2,000)

Variable

overhead     $32,000                                  $32,000     Lower

                    ($16 × 2,000)

Fixed

overhead    $94,000          $54,000           $40,000      Lower

                  ($47 × 2,000)  ($94,000 - $40,000)

Total cost   $282,000     $274,000             ($8,000)     Lower

Working Note:-

1) Fixed overhead applied = $47 × 2,000 = $94000

Decision : Make

Total saving from accepting the accepting the offer of trailblazer = $8,000

Cost saving required to accept the offer of trailblazer = $10,000

Decision - Make (Since actual savings are less than savings required by $2,000)