The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are:

Direct materials	$20,000
Direct labor	$30,000
Variable manufacturing overhead	$15,000
Fixed manufacturing overhead	$58,000

An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $13,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $35,000 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 $2,000

increase by $20,000

increase by $33,000

increase by $28,000