The Hemp division of west company produces ropes. One- third of the hemp division's output is sold to the Hammock products division of West; the reminder is sold to outside customers.
The Hemp division's estimated sales and cost data for the fiscal year ending September 30 are as follows:
Hammock products. Outsiders
Sales. 15,000. 40,000
Variable costs. 10,000. 20,000
Fixed costs. 3,000. 6,000
Gross margin. 2000. 14,000
Unit sales. 10,000. 20,000
The hemp division has an opportunity to purchase 10,000 feet of identical quality rope from an outside supplier at a cost of $1.25 per unit on a continuing basis. Assume that the hemp division cannot sell any additional product to outside customers.
REQUIRED
A. Should west allow its hemp division to purchase the rope from the outside supplier? Why or why not?
B. Assume that the hemp division is now at full capacity and that sufficient demand exists to sell all production to outsiders at present prices. What is the differential cost(benefit) of producing the rope internally?
C. Assume that the quality of the rope is found to be a lesser, but still satisfactory, quality. What factors should be considered?
D. Assume that the quality of the rope is found to be of questionable quality but that the price is $1.00 per unit. What factors should be considered in the decision?