Question

The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 15,000 utensils at $0.90 each. Arthur sells its utensils wholesale for $1.00 each; the average cost per unit is $0.96, of which $0.14 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits

Answer 1

$1,200

Step-by-step explanation:

Since Arthur Company is producing below its capacity, it means it does not have to increase in plant capacity, I mean fixed costs in order to fulfil the special order, hence, in determining the increase in operating profits, we would only consider variable costs.

average cost per unit=variable cost per unit+fixed cost per unit

$0.96=variable cost per unit+$0.14

variable cost per unit=$0.96-$0.14

variable cost per unit=$0.82

Increase in operating profits=(special order price-variable cost per unit)*quantity of special order

special order price=$0.90

variable cost per unit=$0.82

quantity of special order=15000 utensils

Increase in operating profits=($0.90-$0.82)*15000

Increase in operating profits=$1,200