The Hammer Division of Excel Company Produces Hardened Sledge Hammers

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: $\begin{array}{lrr}&\text { Government }\\&\text { Products } & \text { Outside } \\&\text { Division } & \text { Customers }\\ \text { Sales } &\$15,000&\$40,000\\ \text {Variable costs } &(10,000) &(20,000) \\ \text { Fixed costs } &\underline{(3,000) }&\underline{(6,000) }\\ \text { Operating profits } &\underline{\underline{\$2,000}}&\underline{\underline{\$14,000}}\\ \text { Unit sales} &10,000&20,000\\\end{array}$
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.