A Company makes wheels which it uses in the production of children's wagons. The Company's costs to produce 260,000 wheels annually are as follows:
Direct material $ 52,000
Direct labor 78,000
Variable manufacturing overhead 39,000
Fixed manufacturing overhead 79,000
Total $248,000
An outside supplier has offered to sell the company similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $34,000 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 $93,400 per year.
If the company chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a: $52,000 incrase or $5,000 decrease or $70,600 increase or $88,400 increase.