Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 40

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	$ 25
Direct labor	53
Variable overhead	16
Fixed overhead	47
Total	$141

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 $10,000 per year. Accepting Trailblazers’s offer would eliminate annual fixed overhead of $40,000.

Required

Should Mobility make rear wheel assemblies or buy them from Trailblazers? Prepare a schedule that shows the differential costs per rear wheel assembly.