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12 July, 03:39

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

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  1. 12 July, 04:05
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    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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