Janeiro Skate, Incorporated Currently Manufactures the Wheels That It Uses

question 318

Essay

Janeiro Skate, Incorporated 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:
Kasba 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?

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