Talboe Company makes wheels which it uses in the production of children\'s wagon
ID: 2378420 • Letter: T
Question
Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 230,000 wheels annually are as follows:
73,000
$222,500
An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $28,000 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 $70,900 per year.
Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 230,000 wheels annually are as follows:
Explanation / Answer
Per Unit Costs:
DM: $46000/230000 = $0.20 per unit
DL: $69000/230000 = $0.30 per unit
VOH: $34500/230000 = $0.15 per unit
Total Per Unit Cost = $0.20 + $0.30 + $0.15 = $0.65 per unit
Total Manufacturing Cost = $222500 (given)
Hire a Company to Make:
Total Per Unit Cost = $0.80
Total Variable Costs = $0.80*230000 = $184,000
Savings on Fixed Overhead = 28,000 (Given)
New Fixed Overhead = $73000 - $28000 = $45,000
Total Manufacturing Cost = $184000 + $45,000 = $229,000
Income from Renting Facility = 70,900
SO Total Mfg. Cost with Rent Reduction = 229,000-70,900 = $158,100
So Increase in Net Income = Old Total Cost - New Total Cost
Increase in Net Income = $222,500 - $158,100 = $64,400
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