Question

Part 1:  Make or Buy Decisions

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          $          30         

Direct labor                             52         

Variable overhead                   21         

Fixed overhead                       52         

Total                             $           155     

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 $41,100.

Required:

a. Using Excel, prepare a schedule that shows the total differential costs. Indicate if the differential cost is higher, lower or no effect under the assumption that Status Quo is the base.  

b. Should Mobility make rear wheel assemblies or buy them from Trailblazers?  Why? Be sure to provide a complete justification for your decision.

Answer 1

Answer:

a.

	Status Quo	Alternative	Difference
Trailblazers’ offer		220,000	220,000	higher
Materials	60,000		60,000	lower
Labor	104,000		104,000	lower
Variable Overhead	42,000		42,000	lower
Fixed Overhead applied	104,000	62,900	41,100	lower
Total Costs	310,000	282,900	(27,100)	lower

Calculation of above values:

Status Quo = Based on 2,000 units

Fixed overhead applied = $52 × 2,000 units = $104,000; 104,000− $41,100 = $62,900

Trailblazers’ offer Alternative = 110*2000 = 220,000

Status Quo Costs incurred :

Labor = 52 * 2000 = 104,000

Materials = 30*2000 = 60000

Variable overhead = 21*2000 = 42000

Fixed overhead = 52*2000 = 104,000

b. Buy

Mobility could buy rear wheel assembles from Trailblazers, than making those. The $20,000 savings could be achieved by buying that. The cost to make is $27,100 more than the cost to purchase from Trailblazers.