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

Fixed overhead 300,000

Total $ 570,000

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.

Is this a wise deal for Janeiro to take?