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 2,000 units). Direct materials $ 50 Direct labor 106 Variable overhead 32 Fixed overhead 94 Total $ 282 Trailblazers has offered to sell the assembly to Mobility for $220 each. The total order would amount to 2,000 rear wheel assemblies per year, which Mobility management will buy instead of make if Mobility can save at least $20,000 per year. Accepting Trailblazers offer would eliminate annual fixed overhead of $80,000. Required: a. Prepare a schedule that shows the total differential costs.

Answer 1

Answer:

$\left[\begin{array}{cccc}&Produce&Buy&Differential\\ Variable Cost&376000&440000&64000\\ Fixed Cost&188000&108000&-80000\\ Total Cost&564000&548000&-16000\\\end{array}\right]$

Their cost will decrease by 16,000 which is below the bare minimum to outsource the part. The offer should be rejected

Explanation:

We solve for variable cost:

DM + DL + VMO = 50 + 106 + 32 = 188

We multiply by the 2,000 units and get 376,000

Now, we solve for fixed cost:

2,000 x 94 = 188,000

Last the offer is 220 per part

2,000x $220 = 440,000

and fixed cost will decrease by 80,000 decreasing to 108,000 from 188,000

Now we build the differential and check if the savings exceed 20,000 to accept it