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 30^th are as follows:

	Sales to Lawn Products Division				Sales to Outsiders
Revenue	$	31,500			$	84,000
Variable costs		21,000				42,000
Fixed costs		6,000				28,500
Gross margin	$	4,500			$	13,500
Unit sales		21,000				42,000

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 $1.50 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?

Answer 1

Solution:

	Lawn products	Outsiders
Sales	31,500	84,000
Variable costs	(21,000)	(42,000)
Fixed costs	(6,000)	(28,500)
Gross margins	4,500	13,500
Unit sales	21,000	42,000
Per unit selling price	1.5	2

Selling price of blade division	$1.5
Selling price of outside supplies	$1.5
saving per unit	$0

Unit purchase	10,000 units
Total savings	0
Gross margin when selling to lawn products division	$4,500
Saving of Dana company (0-$4,500)	($4,500)

No,Dana company shall not allow purchase of blades from outside as its overall income will decrease by $ 4500 if purchased from outsiders .