Question

The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's output is sold to the Government Products Division of Excel; the remainder is sold to outside customers. Hammer's estimated operating profit for the year is: Government Products Division Sales $ 33,000 Variable costs (10,600) Fixed costs (6,000) Operating profits $ 16,400 Unit sales 10,600 Outside Customers $ 76,000 (21,200) (12,000) $ 42,800 21,200 The Government Products Division has an opportunity to purchase 10,600 hammers of the same quality from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional products to outside customers. Should the Excel Company allow its Government Products Division to purchase the hammers from the outside supplier at $1.25 per unit?

Answer 1

Solution:

Variable cost per unit of hammer = $10,600 / 10600 = $1 per unit

As excel company producing the hammer for $1 per unit, therefore excel company do not allow its government products division to purchase the hammers from the outside supplier.