The Talbot Corporation makes wheels that it uses in the production of bicycles.

Question

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 210,000 wheels annually are: Direct materials Direct labor Variable manufecturing overhead Fixed manufacturing overhead $42,000 $63,000 $31.500 $69,000 An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier. $24.000 of annual fixed overhead could be avoilded and the facilities now being used could be rented to another company for $57.900 per year. Direct labor is a varilable cost If Taibot chooses to buy the wheel from the outside supplier, then annuel net operating income would e supplier, then annual net operating income would O increase by $42.000 O increase by $71100 O increase by $50.400 O decrease by $7.500 O Type here to search

Explanation / Answer

Answer

Working

Annual Net Operating Income would increase/(decrease) by = Total Relevant cost of manufacturing saved - Total cost of buying

Annual Net Operating Income would increase/(decrease) by = (Annual Fixed Overhead avoided + Direct Material + Direct Labor + Variable manufacture + Oppurtunity Cost or gain from renting the facility) - Total cost of buying

Annual Net Operating Income would increase/(decrease) by = (24000+42000+63000+31500+ 57900) - (210000*0.80)

Annual Net Operating Income would increase/(decrease) by = 50400

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