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Answer :
Accepting Benton's offer to buy 30,000 utensils at $0.60 each would result in an increase in Arthur's operating profits by $1,800. This calculation considers Arthur's variable cost of $0.54 per unit and disregards the fixed cost since it remains constant.
The question involves calculating the increase in Arthur's operating profits if the company accepts Benton's offer to buy 30,000 utensils at $0.60 each. Arthur's average cost per unit is $0.68, of which $0.14 is fixed costs. Since the fixed costs remain constant regardless of the production level, only the variable costs (total cost minus fixed costs, i.e., $0.68 - $0.14 = $0.54 per unit) are relevant for this additional order.
Arthur's revenue from the order would be 30,000 units * $0.60/unit = $18,000. The variable cost for producing these additional units would be 30,000 units * $0.54/unit = $16,200. Therefore, the increase in operating profits by accepting the offer would be Revenue - Variable Costs = $18,000 - $16,200 = $1,800.
Accepting Benton's offer would result in an increase in operating profits for Arthur, despite the selling price being below Arthur's usual wholesale price, because it covers the variable costs and contributes to covering fixed costs and adding to the profit.
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Answer:
$1,200
Explanation:
If Arthur decides to sell the 30,000 utensils to Benton, its variable cost per unit = total average cost per unit - fixed cost per unit = $0.68 - $0.14 = $0.56
The gross margin per unit = $0.60 - $0.56 = $0.04, times 30,000 units = $1,200
Since this is a special job order, we do not include the fixed costs in the calculation, we only include the variable costs. The alternative would be not to sell the 30,000 units to Benton, which doesn't alter the fixed costs either.
