The Talbot Corporation makes wheels that It uses In the production of blcycles.

Question

The Talbot Corporation makes wheels that It uses In the production of blcycles. Talbot's costs to produce 260,000 wheels annually are: Direct materials Direct labor Variable manufacturing overhead Fxed manufacturing overhead $52,000 $78,000 $39,000 $79,000 An outslde supplier has offered to sell Talbot similor wheels for $0.80 per wheel. If the wheels are purchased from the outslde supplier, $34,000 of annual fixed overhead could be avolded and the foclities now being used could be rented to another company for $93,400 per year. Direct labor is a variable cost. If Talbot chooses to buy the wheel from the outside supplier, then annual net operating Income would: O decreace by $5.000 O increase by $70.600 increase by $88,400 Increase by $52.000 References

Explanation / Answer

C. increase by $88,400

Total costs avoided when purchased from outside

= Direct Material + Direct Labor + Variable Manufacturing Overhead

= $52,000 + $78,000 + $39,000

= $169,000

Other savings = Reduction in Fixed Cost + Rental Income

= $34,000 + $93,400

= $127,400

Therefore, total savings = $169,000 + $127,400 = $296,400

Total cost of purchasing from outside supplier = $0.80 * $260,000 = $208,000

Therefore, increase in operating income = $296,400 - $208,000 = $88,400

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.