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 Direct labor Variable overhead Fixed overhead Total $ 149 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 $41,700. 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.) Alternative Difference higher Status Quo Trailblazers' offer | $ 52,000 Materials Labor Variable overhead able overhead Fixed overhead applied Total costs $ 52,000 $

Answer 1

	Status Quo	Alternative	Difference
Trailblazers' offer	0	220000	220000	Higher
Materials	52000	0	52000	Lower
Labor	110000	0	110000	Lower
Variable overhead	40000	0	40000	Lower
Fixed overhead applied	96000	54300	41700	Lower
Total costs	298000	274300	23700	Lower

Above figures have been calculated in the following manner:

	Status Quo	Alternative	Difference
Trailblazers' offer	0	=2000*110	220000	Higher
Materials	=2000*26	0	52000	Lower
Labor	=2000*55	0	110000	Lower
Variable overhead	=2000*20	0	40000	Lower
Fixed overhead applied	=2000*48	=96000-41700	41700	Lower
Total costs	298000	274300	23700	Lower