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Make or buy

The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated operating profit for the year is:

Forestry Outside
Division Customers
Sales $15,000 $40,000
Variable costs (10,000 ) (20,000 )
Fixed costs (3,000 ) (6,000 )
Operating profits. $2,000 $ 14,000

Unit sales 10,000 20,000

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis. If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Axe of requiring that the blades be made internally for the Forestry Division?

A. $2,500
B. $5,000
C. $7,500
D. $10,000

Solution Preview

The Blade Division is operating at capacity. When it sells internally to the Forestry Division, the opportunity cost to the Axe is the ...

Solution Summary

The solution explains how to calculate the differential cost in make or buy decision

$2.19