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

Talbot would be indifferent between making or buying the wheels when the cost of making them equals the cost of buying them. The purchase price of $1.60 per wheel is likely the point where these costs are equal.

The Talbot Corporation Makes Wheels That It Uses in the Production