The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 270,000 wheels annually are:

Direct materials	$54,000
Direct labor	$81,000
Variable manufacturing overhead	$40,500
Fixed manufacturing overhead	$77,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $32,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $94,900 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

increase by $86,400

increase by $54,000

decrease by $8,500

increase by $72,100