Asked by Delores Perry on Jul 24, 2024
Verified
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: 
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?
Fixed Manufacturing Overhead
The portion of manufacturing overhead costs that remains constant regardless of the level of production or output volume.
Variable Cost
Costs that vary directly with the level of production or sales volume, such as materials and labor directly involved in manufacturing.
Annual Wheel Needs
The total requirement for wheels within a one-year period, usually in the context of manufacturing or automotive maintenance.
- Gain an understanding of the principle of outsourcing and the choices between making or buying.
Verified Answer
AF
Alima FaginJul 27, 2024
Final Answer : 
* 0.75 × $300,000 = $225,000
Total cost would be lower by $42,000 to buy rather than make the wheels.
* 0.75 × $300,000 = $225,000Total cost would be lower by $42,000 to buy rather than make the wheels.
Learning Objectives
- Gain an understanding of the principle of outsourcing and the choices between making or buying.