Janeiro Skate,Inc

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?

Correct Answer:

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* 0.75 × $300,000 = $225,000
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