Question

he 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 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

Answer 1

Average cost = $0.83 per utensil

Average Fixed cost = $0.12 per utensil

Average variable cost per utensil =  Average cost - Average Fixed cost

= 0.83 - 0.12

= $0.71

Special order selling price = $0.75

Profit per unit in special order = Special order selling price - Average variable cost per utensil

= 0.75 - 0.71

= $0.04

Special order quantity = 20,000 utensil

Increase in operating income = Special order quantity x Profit per unit in special order

= 20,000 x 0.04

= $800

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