Question

Talboe Company makes wheels which it uses in the production of children's wagons.Talboe's costs to produce 200,000 wheels annually are as follows:Direct material $40,000Direct labor 60,000Variable manufacturing overhead 30,000Fixed manufacturing overhead 70,000Total $200,000An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a:

Answer 1

Answer:

$40,000 increase in annual net operating income

Explanation:

If Talboe buys the the wheels then the annual net operating income of the company will be $40,000

Cost of purchasing wheels $0.80 per wheel * 200,000 wheels = $160,000

savings in fixed cost $25,000

Rental income from wheels $55,000

Net cost of buying the wheels $80,000

If company manufactures the wheels its total cost is $200,000

The net change in operating income is $200,000 - $160,000