Problem:
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