The Blade Division of Dana Company produces hardened steel blades. Approximately
ID: 2476533 • Letter: T
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:
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?
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?
Explanation / Answer
Statement showing computations Particulars Cost to Dana if Blade makes Outside Supplier Variable Costs to make 10,000.00 Costs to purchase from outside = 10,000*1.25 12,500.00 Relevant costs 10,000.00 12,500.00 Lawn would be considering purchase from outside as it will result in costs of 12,500 which would be less than present costs (Transfer Price) of 15,000. But by doing this Blade would loose 5,000 per year (Sale 15,000 - Variable costs 10,000). So Dana company would not allow Lawn product division to purchase from outside as overall profitability of company would be reduced by 2,500 (12,500-10,000)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.