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

a)

Cost Evaluation under Make or Buy decision (Differntial basis)		Amount $
	Working	Make	Buy
No of Units	A	2000	2000
Cost of Manufacturing goods (WN 1)	B	103
Cost of purchase of goods (WN 1)	C		110
Variable cost of make/Buy	D =(A*B and A*C)	206,000	220,000
Saving in Fixed Cost	E	-	41,100
Total cost of make/Buy	D-E	206,000	178,900
Difference in Make/Buy cost	206000-178900	27,100	-

Cost is higher in Make decision by $ 27,100

WN 1: Calculating Cost per Unit	Amount $
Direct Material	30.00
Direct Labour	52.00
VariableManufacturing Overhead	21.00
Cost per Unit	103.00

B) Mobility make rear wheel assemblies should buy from Trailblazers as there is cost saving of $ 27,100 due to outsourcing decision which is greater than $ 20,000 as per management's condition.