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 $ 25
Direct labor 53
Variable overhead 16
Fixed overhead 47
Total $ 141
Trailblazers 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 $10,000 per year. Accepting Trailblazers's offer would eliminate annual fixed overhead of $40,000.
Required:
(a) Prepare a schedule that shows the differential costs on the 2,000 rear wheel assemblies order. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values. Omit the "$" sign in your response.)
(b) Should Mobility make rear wheel assemblies or buy them from Trailblazers?

Answer 1

Answer:

Net savings from buying  $ 8,000

Decision : The company should assemble

Explanation:

Unit variable cost of making = 25+ 53+ 16+ 47 = $94

                                                                                      $

Total variable cost ( $94 × 2,000) =                     188,000

Total cost of external purchase  ($110× 2000)    220,000

Extra variable cost from external purchase        (32,000 )

add Savings in fixed overheads                           40,000

Net savings from buying                                        8,000

Note that the fixed cost were not included because they not relevant for the decision. They would be incurred either way.

Decision.

Since the management wishes tom save at least $10,000 per year but the analysis above shows that the company can only save $8,000, then Mobility should not buy the product but rather assemble them