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): $ 27 108 Direct materials Direct labor Variable overhead Fixed overhead Total 16 43 $194 Trailblazers has offered to sell the assembly to Mobility for $161 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 $36,750. 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

Answer 1

Trailblazer's offer Material Labor Variable Overhead Fixed Overhead applied Total Cost Status Quo Alternative 0 $289,800 $48,600 0 $194, 4000 $28,800 0 $77,400 $40,650 $349,200 $330,450 Difference $289,800 higher $48,600 lower $194,400| lower $28,800| lower $36,750 lower $18,750 lower Working Status Quo 1 Trailblazer's offer Material Labor Variable Overhead Fixed Overhead applied Alternative 161 x 1800 0 0 27 x 1800 108 x 1800 16 x 1800 43 x 1800 0 77400-36750 Difference is changes in status quo and alternative. Mobility expected to save atleast $20000, but the savings are $18750 so the company will make rear wheels assemblies in house rather than buying from trailblazer.