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		110
Variable overhead		14
Fixed overhead		38
Total	$	192

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 $39,150.

Required:

a. Prepare a schedule that shows the total differential costs

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

Answer 1

Differential Analysis
			Status Quo	Alternative	Difference
Trailblazers offer		0	2,84,400	-2,84,400
Material			54,000	0	54000
Labour			1,98,000	0	198000
Variable overheads		25,200	0	25200
Fixed overheads applied	68,400	29,250	39,150
Total cost			3,45,600	3,13,650	31950