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	$	30
Direct labor		103
Variable overhead		16
Fixed overhead		38
Total	$	187

Trailblazers has offered to sell the assembly to Mobility for $158 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 $38,850.

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.)

	Status Quo	Alternative	Difference
Trailblazers' offer
Materials
Labor
Variable overhead
Fixed overhead applied
Total costs

* Can you please write down "higher" or "lower" or "none" in Difference?*

Answer 1

a.

	Status Quo	Alternative	Difference
Trailblazers' offer	0	1,800 x 158 = 284,400	284,400 higher
Materials	1,800 x 30 = 54,000	0	54,000 lower
Labor	1,800 x 103 = 185,400	0	195,400 lower
Variable overhead	1,800 x 16 = 28,800	0	28,800 lower
Fixed overhead applied	1,800 x 38 = 68,400	68,400-38,850 = 29,550	38,850 lower
Total costs	366,600	313,950	$52,650 lower

Since by accepting Trailblazer offer, total cost will be $52,650 lower, which is more than management's requirement, hence the offer must be accepted.

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