Question - Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows:
Direct materials $40,000
Direct labor 60,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 70,000
Total Cost $200,000
An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year.
Required: If Talboe chooses to buy the wheel from the outside supplier, then find the change in annual net operating income.