Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:
- Total Cost
- Direct material $ 165,000
- Direct labor 45,000
- Variable overhead 60,000
Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually
Direct material $ 165,000.00 Direct labor $ 45,000.00 Variable overhead $ 60,000.00 Variable Cost $ 270,000.00 Fixed overhead (75%) $ 225,000.00 Total Variable Cost $ 495,000.00 Per unit variable cost $ 3.30 Per unit purchase price $ 3.50 Saving per unit $ (0.20) Saving in production $ (3,000.00) Rent revenue $ 72,000.00 Total savings $ 69,000.00.Is this a wise deal for Janeiro to take? I don't see them saving any money per unit or in production. But they are gaining $69k.