2. The Blade Division of Dana Company produces hardened steel blades. Approximat
ID: 2475863 • Letter: 2
Question
2.
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:
Lawn
Products
Division
Outsiders
Sales
$15,000
$40,000
Variable costs
10,000
20,000
Fixed costs
3,000
6,000
Gross margin
$2,000
$14,000
Unit sales
10,000
20,000
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 $1.25 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?
Lawn
Products
Division
Outsiders
Sales
$15,000
$40,000
Variable costs
10,000
20,000
Fixed costs
3,000
6,000
Gross margin
$2,000
$14,000
Unit sales
10,000
20,000
Explanation / Answer
If purchased from outside supplier :
No,Dana company shall not allow purchase of blades from outside as its overall income will decrease by $ 2500 if purchased from outsiders .
Incremental cost [10000*1.25] -12500 Less:Incremntal savings Variable cost 10000 Net incremental savings /(cost) -2500Related Questions
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