Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:??Total Cost?Direct materials$165,000?Direct labor45,000?Variable manufacturing overhead60,000?Fixed manufacturing overhead300,000?Total$570,000Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Assume that direct labor is a variable cost.Required:Based on this information, would Janeiro be financially better off to continue making the
wheels or to buy them from Kasba?
What will be an ideal response?
| ? | ? | Make | Buy |
| ? | Outside purchase ($3.50 × 150,000) | ? | $525,000 |
| ? | Direct materials | $165,000 | ? |
| ? | Direct labor | 45,000 | ? |
| ? | Variable manufacturing overhead | 60,000 | ? |
| ? | Fixed manufacturing overhead* | 225,000 | ? |
| ? | Opportunity cost | 72,000 | ? |
| ? | Total cost | $567,000 | $525,000 |
* 0.75 × $300,000 = $225,000
Total cost would be lower by $42,000 to buy rather than make the wheels.
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