Janeiro Skate, Inc Kasba Rubber Company Has Offered to Provide Janeiro with All

Essay

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:
$\begin{array}{lr} & \text { Total Cost } \\\text { Direct materials } & \$ 165,000 \\\text { Direct labor } & 45,000 \\\text { Variable manufacturing overhead } & 60,000 \\\text { Fixed manufacturing overhead } & 300,000 \\\text { Total } & \$ 570,000\end{array}$ 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?