Talboe Company makes wheels which it uses in the production of children\'s wagon

Question

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 240,000 wheels annually are as follows:

74,000

$230,000

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $29,000 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 $76,600 per year.

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 240,000 wheels annually are as follows:

Explanation / Answer

$69,600 increase is right answer Working ------------ Incremantal income from Buying from supplier = $76,600 + $29000 + $48000 + $72000 + $36000 = $261600 Incremental Costs from Buying from supplier = 240000 x 0.8 = $192000 change in annual net operating income = $261600 - $192000 = $69600

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