Question

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are:               

Direct materials	$20,000
Direct labor	$30,000
Variable manufacturing overhead	$15,000
Fixed manufacturing overhead	$58,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $13,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $35,000 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:

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decrease by $2,000

increase by $20,000

increase by $33,000

increase by $28,000

Answer 1

Answer:
Particulars	Amount (in $ )	Amount (in $ )
Relevant manufacturing Costs:
Direct materials Costs	$ 20,000
Direct labor	$ 30,000
Variable manufacturing overhead	$ 15,000
Annual Fixed Overhead	$ 13,000
Opportunity Cost	$ 35,000
Total costs		$ 113,000
Less: Purchase Price ( 100,000 Wheels x $ 0.80 )		$ 80,000
Annual Net Opearting Income Increases by		$ 33,000
Option (C ) is Correct