Reference no: EM134176

Question :

The Knott Division of Wright corporation 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 evaluated sales and standard cost data for the fiscal year ending Sept. 30 are as given:

                                              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 buy 10,000 feet of identical quality rope from an outside supplier at a cost of $1.50 per unit on a continuing basis. Suppose that the Knott Division can't sell any additional product to outside customers.

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

a. Yes, because buying the rope could save Wright Company $2,500

b. No, because making the rope could save Wright Company $2,500.

c. Yes, because buying the rope could save Wright Company $5,000.

d. No, because making the rope could save Wright Company $5,000