Question

The Blade Division of Dana Company produces hardened steel blades. Approximately one-third of the Blade Division's output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. Blade Division's estimated sales and cost data for the year ending June 30th are as follows: Sales to Lawn Products Division Sales to Outsiders Revenue $ 19,500 $ 52,000 Variable costs 13,000 26,000 Fixed costs 3,600 10,500 Gross margin $ 2,900 $ 15,500 Unit sales 13,000 26,000 The Lawn Products Division has an opportunity to purchase, on a continual basis, 10,000 blades (of identical quality) from an outside supplier, at a cost of $1.40 per unit. Assume that the Blade Division cannot sell any additional products to outside customers. Assume, too, that there are no short-term avoidable fixed costs. Based solely on short-term financial considerations, should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why? Multiple Choice

a. Yes, because buying the blades would save Dana Company $2,000.

b. No, because making the blades would save Dana Company $3,000.

c. Yes, because buying the blades would save Dana Company $4,000.

d. No, because making the blades would save Dana Company $4,000.

Answer 1

Solution Lawn Products Outsiders Division $52,000 $13,000 $26,000 10,500 15,500 $19,500 Revenue Variable costs Fixed costs Gross Margin 3,600 2,900 Unit sales 13000 26000 $1.40 per unit Offer price from outside supplier If Lawn Products division purchases 10,000 units from outside supplier, the company shall incurr purchase cost of $1.40 per unit, however in this case, the company shall be able to avoid variable cost on 10,000 units. We shall prepare the incremental analysis to analyze the financial impact if the Lawn Products Division purchases 10,000 units from outside supplier Incremental Analysis emental c Purchase cost (10,000 units x $1.40) ($14,000) mental Savin Variable cost of production (10,000 units x $13,000/13000) $10,000 Incremental savings (cost) 4,000 Dana should not allow its Lawn Products Division to purchase the blades from the outside supplier, as making the blades would save Dana Company $4,000 nce, the correct o d. No, because making the blades would save Dana Company $4,000.