The Hammer Division of Excel Company Produces Hardened Sledge Hammers

question 6

Multiple Choice

The Hammer Division of Excel Company produces hardened sledge hammers.One-third of Hammer's output is sold to the Government Products Division of Excel;the remainder is sold to outside customers.Hammer's estimated operating profit for the year is:
$$\begin{array} { | l | r | r | } \hline & \begin{array} { r } \text { Govemment } \\\text { Products } \\\text { Disision }\end{array} & \begin{array} { r } \text { Outside } \\\text { Customers }\end{array} \\\hline \text { Sales } & \$ 15,000 & \$ 40,000 \\\hline \text { Variable costs } & ( 10,000 ) & ( 20,000 ) \\\hline \text { Fixed costs } & \underline { ( 3,000 ) } & \underline { ( 6,000 ) } \\\hline \text { Operating protits } & \$ 2,000 & \$ 14,000 \\\hline \text { Unit sales } & 10,000 & 20,000 \\\hline\end{array}$$
The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality from an outside supplier on a continuing basis.The Hammer Division cannot sell any additional products to outside customers.Should the Excel Company allow its Government Products Division to purchase the hammers from the outside supplier at $1.25 per unit?

• A) No;making the hammers will save Excel $1,500.
• B) Yes;buying the hammers will save Excel $1,500.
• C) No;making the hammers will save Excel $2,500.
• D) Yes;buying the hammers will save Excel $2,500.

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