Question

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: restry Division Outside Customers Sales Variable costs Fixed costs $ 17,000 $ 44,000 (10.200) (20.400) (3,100) || (6,050) Operating profits IS 3,700 $ 17,550 Unit sales || 10.200 || 20.400 The Forestry Division has an opportunity to purchase 10.200 blades of the same quality from an outside supplier on a continuing basis. The Blade Division cannot sell any additional products to outside customers. Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at $1.35 per unit? Multiple Choice o Yes; buying the blades will save Axe $3.570. 0 No; making the blades will save Axe $3.570. o Nomaking the blades will save Axe $3,780. o Yes: buying the blades will save Axe $3.780.

Answer 1

Only variable costs are relevant costs for deciding whether to make or buy
Cost to buy from outside supplier	13770	=10200*1.35
Less: Variable costs of making	10200
Net difference in favor of making	3570
No; making the blades will save Axe $3,570
Option B is correct