The Blade Division of Dana Company produces hardened steel blades. Approximately

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? A yes because buying the blades would save rosey company 500 B NO because making blades would save Rowey 1,500 C Yes because making the blades would save Rowey 2,500 D no becasse the blades would save 2,500

Explanation / Answer

Answer:D no becasse the blades would save 2,500

1.Relevant cot for making the blades : $10000 / 10000 = $ 1 ; $ 20000 / 20000 = $ 2

2.Cost to buy is $ 1.25 > than cot to make $ 1

3. $ 0.25 x 10000 = $ 2500 (loss )

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