Janeiro Skate, Inc

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: 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?