Question

The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each. Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits

Answer 1

Lamar's operating profits will increase by $1,900

Step-by-step explanation:

Incremental costs are the change in total cost that arise due to a decision made. In case of order of Boston Company incremental costs is only the variable part of the cost associated withthe production of tolls. Fixed costs are already incurred and it can be avoidable.

Cost per unit = $1.83

Variable cost = Total cost per unit - Fixed cost per unit = $1.83 - $0.27 = $1.56

Marginal Contribution per unit = Selling price - variable cost = $1.75 - $1.56 = $0.19

Total addition to operating profit = $0.19 x 10,000 = $1,900