9. The Hemp Division of West Company produces rope. One-third (10,000 feet) of the Hemp Division’s output is sold to the Hammock Products Division of West; the remainder (20,000 feet) is sold to outside customers. The Hemp Division’s estimated sales and cost data for the fiscal year ending September 30 are as follows:

Hammock Products Outsiders Sales

Sales Rs.7,50,000 Rs.20,00,000

Variable costs 5,00,000 10,00,000

Fixed costs 1,50,000 3,00,000

Gross margin Rs.1,00,000 Rs.7,00,000

Unit sales 10,000 20,000

The Hemp Division has an opportunity to purchase 10,000 feet of identical-quality rope from an outside supplier at a cost of Rs.62.50 per unit on a continuing basis. Assume that the Hemp Division cannot sell any additional product to outside customers.

A. Should West allow its Hemp Division to purchase the rope from the outside supplier? Why or why not?

B. Assume that the Hemp Division is now at full capacity and that sufficient demand exists to sell all production to outsiders at present prices. What is the differential cost (benefit) of producing the rope internally?

C. Assume that the quality of the rope is found to be of a lesser, but still satisfactory, quality. What factors should be considered?

D. Assume that the quality of the rope is found to be of questionable quality but that the price is Rs. 50 per unit. What factors should be considered in the decision?