Question

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

Sales (14,200 units at $17)				$	241,400
Direct materials and direct labor	$	99,400
Overhead (20% variable)		14,200
Selling and administrative expenses (all fixed)		18,460			(132,060	)
Operating income				$	109,340

A foreign company (whose sales will not affect Benjamin’s market) offers to buy 3,550 units at $13.60 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $880 and selling and administrative costs by $900. Assuming Benjamin’s productive capacity is 14,200 units per year and accepts the offer, its profits will:

Multiple Choice

Decrease by $12,070.

Decrease by $13,850.

Decrease by $ 97,270.

Increase by $ 10,290.

Increase by $ 4,450.

Answer 1

Evaluation:

Sales 3,550*13.60	48,280
Less: Variable Costs
Direct material and labor 99400*3550/14,200	24,850
Overheads – Variable	710
Contribution Margin	22,720
Additional Fixed Costs 880+900	1,780
Net Profit	20,940

Lost contribution on regular sales:

Sales 3550*17	60,350
Less: Variables Costs
Direct material and labor 99400*3550/14,200	24,850
Overheads – Variable	710
Contribution Margin	$34,790

Accepting offer, Income = 20.940 – 34,790 = $(13,850)

Hence,

Decrease by $13,850.

Is the answer