Talboe Company Makes Wheels That It Uses in the Production

question 24

Multiple Choice

Talboe Company makes wheels that it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows: $\begin{array}{lrr} \text {Direct materials } &£40,000\\ \text {Direct labour. } &60,00\\ \text {Variable manufacturing overhead } &30,000\\ \text {Fixed manufacturing overhead } &\underline{70,000}\\ \text {Total } &\underline{£200,000}\\\end{array}$

An outside supplier has offered to sell Talboe similar wheels for £0.80 per wheel. If the wheels are purchased from the outside supplier, £25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to anther company for £55,000 per year.
-If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a

• A)£5,000 decrease.
• B)£50,000 increase.
• C)£70,000 increase.
• D)£40,000 increase.

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Definitions:

Semiannual Interest

Interest calculated or paid twice a year on loans, bonds, or savings accounts.

Accrued Interest

Interest that has been generated but remains unpaid.

Semiannual Interest

Interest that is calculated and paid twice a year.

Consolidated Financial Statements

Financial statements that combine the financial information of a parent company and its subsidiaries into one set of statements.