Question

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

Sales (12,000 units at $12)				$	144,000
Direct materials and direct labor	$	84,000
Overhead (20% variable)		12,000
Selling and administrative expenses (all fixed)		16,800			(112,800	)
Operating income				$	31,200

A foreign company (whose sales will not affect Benjamin’s market) offers to buy 3,000 units at $9.60 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $670 and selling and administrative costs by $700. Assuming Benjamin’s productive capacity is 12,000 units per year and accepts the offer, its profits will:

a. Decrease by $8,570

b. Increase by $3,700

c. (Incorrect) Increase by $5,830

d. Decrease by $24,000

e. Decrease by $7,200

I tried to work this question out on my own following a question similar to this one and I ended up getting increasing by $1,840... If you answer please write out how you got everything so I can learn how to do it. Thank you!

Answer 1

	Current sales 12,000 units	9,000 units	3,000 units
Sales	$144,000	$108,000 (9,000*$12)	$28,800 (3,000*$9.60)
Variable costs:
Direct material and direct labor	84,000	63,000 ($84,000/12,000*9,000)	21,000 ($84,000/12,000*3,000)
Variable overhead	2,400 (12,000*20%)	1,800 ($12,000*20%/12,000*9,000)	600 ($12,000*20%/12,000*3,000)
Contribution margin	57,600	43,200	7,200
Fixed costs:
Fixed overhead	9,600	9,600 ($12,000*80%)	670
Selling and administrative costs	16,800	16,800	700
Net operating income	$31,200	$16,800	$5,830

As per above results, Net operating income decrease by $8,570 [$31,200 - (16,800+5,830)].