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

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Business

Tess Moyer

23 March, 02:21

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

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Derick Miller · Answer 1

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) 125,000

Extra variable cost of buying (25,000)

Add savings in fixed cost from 15,000

Add rent from facilities 45,000

Increase in net annual operating income 35,000

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