The Talbot Corporation makes wheels that it uses in the production of bicycles.Talbot's costs to produce 100, 000 wheels annually are: An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel.If the wheels are purchased from the outside supplier, $15, 000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45, 000 per year.Direct labor is a variable cost. At what purchase price for the wheels would Talbot be indifferent between making or buying the wheels?
A)$1.70 per wheel
B)$1.60 per wheel
C)$1.55 per wheel
D)$1.15 per wheel

Question

The Talbot Corporation makes wheels that it uses in the production of bicycles.Talbot's costs to produce 100, 000 wheels annually are:  An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel.If the wheels are purchased from the outside supplier, $15, 000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45, 000 per year.Direct labor is a variable cost. At what purchase price for the wheels would Talbot be indifferent between making or buying the wheels?
A)$1.70 per wheel 
B)$1.60 per wheel 
C)$1.55 per wheel 
D)$1.15 per wheel

Quizplus · Accepted Answer

To find the indifference point, we need to calculate the total cost of producing 100,000 wheels and compare it to the total cost of purchasing them from the outside supplier.

Total cost to produce 100,000 wheels: 
Direct materials: $75,000 
Direct labor: $60,000 (assuming $0.60 per wheel) 
Variable overhead: $30,000 (assuming $0.30 per wheel) 
Fixed overhead: $45,000 (allocated at a rate of $0.45 per wheel) 
Total: $210,000

Total cost to purchase 100,000 wheels: 
100,000 x $1.25 = $125,000

Savings if purchasing from outside supplier: 
Fixed overhead: $15,000 
Rent: $45,000 
Total: $60,000

Adjusted total cost to produce 100,000 wheels: 
$210,000 - $60,000 = $150,000

Now we can set up the equation:

$1.25x = $150,000 
x = $120,000 / 100,000 
x = $1.20

This means that if the outside supplier offered to sell the wheels for less than $1.20 per wheel, it would be more cost-effective for Talbot to purchase them rather than produce them.

Therefore, the answer is B) $1.60 per wheel.

The Talbot Corporation Makes Wheels That It Uses in the Production