The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker;the remainder is sold to outside customers.Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle 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 Becker of requiring that the axles be made internally and sold to the internal division?
A)$25,000.
B)$50,000.
C)$70,000.
D)$100,000.

Question

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker;the remainder is sold to outside customers.Axles' estimated operating profit for the year is:  The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle 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 Becker of requiring that the axles be made internally and sold to the internal division?
A)$25,000. 
B)$50,000. 
C)$70,000. 
D)$100,000.

Quizplus · Accepted Answer

The Axle Division of Becker Company produces and sells 20,000 units (two-thirds of 30,000 units) to outside customers. If the internal division decides to buy 10,000 units from the outside supplier instead of from the Axle Division, the Axle Division would still have to produce and sell 20,000 units to outside customers.

The internal division would then purchase 10,000 axles from the outside supplier for $13 each, for a total cost of $130,000.

If the Axle Division had produced and sold those 10,000 units to the internal division, they would have foregone the opportunity to sell them to outside customers for the current selling price, which is not specified in the question. However, we know that Axle Division's estimated operating profit for the year is $311,000 (based on the provided number).

Assuming that the current selling price is at least $13 per unit, the differential cost to Becker of requiring that the axles be made internally and sold to the internal division would be:

(10,000 units x $13 per unit) - (10,000 units x estimated operating profit per unit)

= $130,000 - ($311,000/30,000 units x 10,000 units)

= $130,000 - $103,333.33

= $26,666.67

Therefore, the differential cost to Becker of requiring that the axles be made internally and sold to the internal division is $26,666.67, which is closest to option C ($70,000).

The Axle Division of Becker Company Produces Axles for Off-Road