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 200,000 wheels annually are as follows: An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 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 $55,000 per year. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a: A) $5,000 decrease B) $50,000 increase C) $70,000 increase D) $40,000 increase

Explanation / Answer

C) $70,000 increase

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