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.

-If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:
A)increase by $35,000.
B)decrease by $10,000.
C)increase by $45,000.
D)increase by $70,000.

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.

-If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:
A)increase by $35,000. 
B)decrease by $10,000. 
C)increase by $45,000. 
D)increase by $70,000.

Quizplus · Accepted Answer

If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would increase by $35,000. This is because the cost of the wheel from the outside supplier is $10,000 less than the cost of producing the wheel in-house.

The Talbot Corporation Makes Wheels That It Uses in the Production