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	$	33
Direct labor		101
Variable overhead		15
Fixed overhead		41
Total	$	190

Trailblazers has offered to sell the assembly to Mobility for $157 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 $35,550.

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

	Status Quo	Alternative	Difference
Trailblazer's Offer		$      282,600	$      282,600	Higher
Materials	$         59,400		$         59,400	Lower
Labor	$      181,800		$      181,800	Lower
Variable Overhead	$         27,000		$         27,000	Lower
Fixed Overhead applied	$         73,800	$         38,250	$         35,550	Lower
Total Costs	$      342,000	$      320,850	$        21,150	Lower

Offer should be accepted