Annual net operating income

Question

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 230,000 wheels annually are as follows:

 

Direct material	$ 46,000
Direct labor	69,000
Variable manufacturing overhead	34,500
Fixed manufacturing overhead	73,000
Total	$222,500

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $28,000 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 $70,900 per year.

If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a:

	$64,400 increase
	$72,100 increase
	$46,000 increase
	$6,500 decrease