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NNADVOKAT [17]
3 years ago
5

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annuall

y are: Direct materials $30,000 Direct labor $50,000 Variable manufacturing overhead $20,000 Fixed manufacturing overhead $70,000 An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year. Direct labor is a variable cost. If Talbot chooses to buy the wheel from the outside supplier, then annual net operatingincome would: A. Increase by $35,000 B. Decrease by $10,000 C. Increase by $45,000 D. Increase by $70,000
Business
1 answer:
deff fn [24]3 years ago
6 0

Answer:

Increase in net annual operating income  $35,000

Explanation:  

                                                                                                    $

Variable cost of internal production

(30,000+50,000 + 20,000)                                                    100,000

Variable cost of purchase  (1.25× 100,000)                           <u>125,000</u>

Extra variable cost of buying                                                  ( 25,000)

Add savings in fixed cost from                                                15,000

Add rent from facilities                                                         <u>    45,000</u>

Increase in net annual operating income                            <u>  35,000</u>

Increase in net annual operating income  $35,000

The balance of the the fixed  cost is not relevant hence it was  not considered. This is so because whatever decision is taken, it would be incurred either way

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