The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 190,000 wheels annually are:

Direct materials $38,000 Direct labor $57,000 Variable manufacturing overhead $28,500 Fixed manufacturing overhead $67,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $22,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $52,100 per year. Direct labor is a variable cost.

If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:

increase by $64,900

increase by $6,500

increase by $38,000

decrease by $45,600