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The Knott Division of Wright Company produces rope. One-third of the Knott Division's output is sold to the Hammock Products division of Wright and the remainder is sold to outside customers. The Knott Division's estimated sales and standard cost data for the fiscal year ending Sept. 30 are as follows:

Hammock Products Outside Customers
Sales $ 17,500 $ 40,000
Variable Costs (10,000) (20,000)
Fixed Costs (3,000) (6,000)
Gross Margin 4,500 $ 14,000
Unit Sales 10,000 20,000

The Knott Division has an opportunity to purchase 10,000 feet of identical quality rope from an outside supplier at a cost of $1.50 per unit on a continuing basis. Assume that the Knott Division cannot sell any additional product to outside customers.

Should Wright allow its Knott Division to purchase the rope from the outside supplier, and why?

a. Yes, because buying the rope would save Wright Company $2,500
b. No, because making the rope would save Wright Company $2,500.
c. Yes, because buying the rope would save Wright Company $5,000.
d. No, because making the rope would save Wright Company $5,000

Accounting Basics, Accounting

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