The Talbot Corporation makes wheels that it uses in the production of bicycles.

Question

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 220,000 wheels annually are:               

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $27,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $65,400 per year. Direct labor is a variable cost.

If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:

Noreen 4e Recheck 2017-16-03

A. increase by $44,000

B. increase by $59,400

C. increase by $71,600

D. decrease by $6,000

Direct materials $44,000 Direct labor $66,000 Variable manufacturing overhead $33,000 Fixed manufacturing overhead $72,000

Explanation / Answer

Total cost of making the product = 44000 + 66000 + 33000 + 72000 = 215000

Total cost of buying the product = 220000 Units * 0.80 + Fixed cost ( 72000 - 27000 - 65400 ) = 155600

Thus saving in the total cost = 215000 - 155600 = 59400

When the cost is saved by 59400, we will have profit increase by 59400

So .........select - Option - B as correct answer.

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