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 210,000 wheels annually are as follows:

                    

69,000

$205,500

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $24,000 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 $57,900 per year.

What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels? (Round your answer to 2 decimal places.)

$0.99

$0.98

$0.76

$1.04

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 210,000 wheels annually are as follows:

Explanation / Answer

Calculate highest price paid to outside supplier or indifferent price :

So answer is d) $1.04

Direct material 42000 Direct labour 63000 Variable manufacturing overhead 31500 Fixed manufacturing overhead 24000 Opportunity cost 57900 Total relevant cost of making 218400 UNits 210000 Highest price to outside supplier 1.04

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