Question

The AZ Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each. AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If AZ were to accept BV's offer, what would be the increase in AZ's operating profits?

Answer 1

total profit = $ 800

Step-by-step explanation:

given data

average cost = 0.83 per unit

Fixed Cost = 0.12 per unit

Company offered = $ 0.75 per unit

to find out

increase in AZ's operating profits

solution

we know that Variable Cost = 0.83 - 0.12 = 0.71 per unit

and profit Per unit will be

profit = 0.75 - 0.71 = 0.04 per unit

and Total Profit is here for 20000 unit

Total Profit = 0.04 × 20000

total profit = $ 800

and we know that here

for Average Fixed = 0.12 is remain constant for total production

and Company does not have any additional expenses in connection to Fixed Cost so that Variable cost have to be incurred for additional production