Janeiro Skate, Incorporated currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:
Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Assume that direct labor is a variable cost.
Required:
Based on this information, would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

Question

Janeiro Skate, Incorporated currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:
  Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Assume that direct labor is a variable cost.
Required:
Based on this information, would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

Quizplus · Accepted Answer

The Answer of Janeiro Skate, Incorporated currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:
  Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Assume that direct labor is a variable cost.
Required:
Based on this information, would Janeiro be financially better off to continue making the wheels or to buy them from Kasba?

Janeiro Skate, Incorporated Currently Manufactures the Wheels That It Uses