Problem
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.
What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?