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 $ 26 Direct labor 53 Variable overhead 21 Fixed overhead 49 Total $ 149 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 $38,500. 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

Answer and Explanation:

The preparation of the  total differential cost schedule is presented below

                     Schedule showing statement of total differential cost

Particulars Make the wheels Buy from trailblazers Differential cost

Offer of trailblazer                        $220,000             $220,000 Higher

                                                      (2000 × $110)

Material cost     $52,000                                          $52,000 Lower

                       ($26 × 2000)

Labor cost       $106,000                                            $106,000 Lower

                        ($53 × 2000)

Variable overhead   $42000                                    $42,000 Lower

                          ($21 × 2000)

Fixed overhead  $98000                 $59,500        $38,500     Lower

                       ($49 × 2000)            ($98,000 -$38,500)

Total cost $298,000      $279,500             ($18,500) Lower

By adding the total cost we can get the making cost, buying cost and differential cost