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	$	29
Direct labor		105
Variable overhead		18
Fixed overhead		44
Total	$	196

Trailblazers has offered to sell the assembly to Mobility for $170 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 $10,000 per year. Accepting Trailblazers's offer would eliminate annual fixed overhead of $35,850.

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.)

Answer 1

SOLUTION:

	Status Quo	Alternative	Diff.
Trailblazers’ offer (1800 * $170)		306,000	306,000	higher
Materials (1800 * $29)	52,200		52,200	lower
Labor (1800 * $105)	189,000		189,000	lower
Variable OH (1800 * $18)	32,400		32,400	lower
Fixed OH (1800 * $44)	79,200	43,350	35,850	lower
	352,800	349,350	-3,450	lower