Speedy Sloth Toys Company manufactures and sells 10,000 units of its Dream Lite Pillow per year. Total production costs for making 10,000 pillows are as follows:

Direct materials $40,000

Direct labor $10,000

Variable manufacturing overhead costs $30,000

Fixed manufacturing overhead costs $30,000

Total costs $110,000

Speedy Sloth Company has the option of purchasing 10,000 pillows from an outside supplier at $9.00 per unit. It is estimated that 15% of the fixed manufacturing overhead costs will no longer occur if the company purchases the pillows from the outside supplier.

If Speedy Sloth Company stops making the 10,000 pillows, and instead starts purchasing the 10,000 pillows from the outside supplier, what would be the impact on Speedy Sloth's net operating income?

Net operating income would decrease by $7,000.

Net operating income would increase by $15,500.

Net operating income would increase by $20,000.

Net operating income would decrease by $5,500.