Question

Benjamin Company had the following results of operations for the past year:

Sales (17,600 units at $10.00) $ 176,000
Variable costs
Direct materials 35,200
Direct labor 70,400
Overhead 3,520
Contribution margin 66,880
Fixed costs
Fixed overhead 14,080
Fixed selling and administrative expenses 35,200
Income $ 17,600

A foreign company (whose sales will not affect Benjamin’s market) offers to buy 4,400 units at $7.50 per unit. In addition to variable costs, selling these units would increase fixed overhead by $660 and fixed selling and administrative costs by $330. Assuming Benjamin has excess capacity and accepts the offer, its profits will:
Increase by $33,000.
Decrease by $6,600.
Increase by $4,730.
Increase by $6,600.
Increase by $5,720.

Answer 1

Accepting the foreign company's offer to buy 4,400 units at $7.50 each will result in an increase in Benjamin Company's profits by $4,730, after taking into account additional fixed and variable costs.

Step-by-step explanation:

The student is presented with a scenario in which Benjamin Company is considering an offer to sell additional units at a reduced price to a foreign company. We must calculate the impact on the company's profits if they accept this offer, taking into account additional fixed costs that will be incurred. The original profits are $17,600.

The offer is for 4,400 units at $7.50 per unit. The additional fixed costs are $660 for fixed overhead and $330 for fixed selling and administrative expenses. We must first calculate the incremental revenue from selling the additional units, which would be 4,400 units * $7.50 = $33,000. Then, we subtract the additional incremental costs, which include both variable and fixed costs. The variable costs per unit are the sum of direct materials, direct labor, and overhead, which total $109,120 for 17,600 units or $6.20 per unit. Hence, for 4,400 units, the variable costs will be 4,400 units * $6.20 = $27,280.

Now we can calculate the net impact on profits:
Incremental revenue: $33,000
Incremental variable costs: -$27,280
Additional fixed costs: -$990 (sum of additional fixed overhead and selling/administrative expenses)
Net impact = $33,000 (incremental revenue) - $27,280 (incremental variable costs) - $990 (additional fixed costs) = $4,730.

Therefore, if Benjamin Company accepts the offer, its profits will increase by $4,730.

Answer 2

The change in profit for Benjamin Company, if they accept the offer from the foreign company, will be an increase by $4,730. ​​

Step-by-step explanation:

To determine the change in Benjamin Company's profits if they accept the offer from the foreign company, we need to calculate the additional revenue, the additional variable costs, and the additional fixed costs associated with the sale of 4,400 units at $7.50 per unit.

Additional Revenue:

Selling price per unit = $7.50

Number of units = 4,400

Additional Revenue = 4,400 units × $7.50/unit = $33,000

Additional Variable Costs:

Current variable costs per unit can be calculated from the initial data:

Direct materials: $35,200

Direct labor: $70,400

Overhead: $3,520

Total variable costs = $35,200 + $70,400 + $3,520 = $109,120

Variable cost per unit = $109,120 / 17,600 units = $6.20 per unit

Additional Variable Costs = 4,400 units × $6.20/unit = $27,280

Additional Fixed Costs:

Increase in fixed overhead = $660

Increase in fixed selling and administrative costs = $330

Total Additional Fixed Costs = $660 + $330 = $990

Change in Profit:

Change in Profit = Additional Revenue - Additional Variable Costs - Additional Fixed Costs

Change in Profit = $33,000 - $27,280 - $990

Change in Profit = $33,000 - $28,270 = $4,730. ​​

Therefore, the change in profit for Benjamin Company will be an increase of $4,730. ​​