The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 250,000 wheels annually are:

Direct materials $50,000 Direct labor $75,000 Variable manufacturing overhead $37,500 Fixed manufacturing overhead $81,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $36,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $91,500 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:

Noreen 4e Recheck 2017-16-03

decrease by $1,500

increase by $50,000

increase by $69,500

increase by $90,000