g The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 210,000 wheels annually are: Direct materials $42,000 Direct labor $63,000 Variable manufacturing overhead $31,500 Fixed manufacturing overhead $69,000 An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $24,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $57,900 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

If the part is bought, the company will save $50,400. In other terms, net income will increase by $50,400.

Explanation:

Giving the following information:

Talbot's costs to produce 210,000 wheels annually are:

Direct materials $42,000

Direct labor $63,000

Variable manufacturing overhead $31,500

Avoidable fixed manufacturing overhead= 24,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel.

If the wheels are purchased from the outside supplier, $24,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $57,900 per year.

First, we need to calculate the total cost of production:

Total cost= 42,000 + 63,000 + 31,500 + 24,000= $160,500

Now, the total cost of buying:

Total cost= 210,000*0.80 - 57,900= $110,100

If the part is bought, the company will save $50,400.

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