Reference no: EM131824274

Question - Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows:

Direct materials                             $40,000

Direct labor                                   60,000

Variable manufacturing overhead    30,000

Fixed manufacturing overhead        70,000

Total Cost                                     $200,000

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 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 $55,000 per year.

Required: If Talboe chooses to buy the wheel from the outside supplier, then find the change in annual net operating income.