Talboe Company Makes Wheels That It Uses in the Production

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.
- What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?

A) £0.95
B) £1.15
C) £1.00
D) £1.05