The Arthur Company manufactures kitchen utensils and is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 17,000 utensils at $0.85 each. Arthur sells its utensils wholesale for $0.96 each; the average cost per unit is $0.91, of which $0.10 is fixed costs.

If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

A. $850
B. $680
C. $1,020
D. $1,870

Arthur's Company would experience a $170 loss in operating profits if it accepted Benton's offer to buy 17,000 utensils at $0.85 each. This is because the variable cost per unit is greater than Benton's offering price, leading to a loss of $0.01 per unit.

Explanation:

First let's calculate the current profit for Arthur's Company per utensil, which would be the selling price minus the average cost per unit. This is $0.96 - $0.91 = $0.05 per utensil. Arthur's proposal from Benton to buy 17,000 utensils at $0.85 each would have a new profit per unit of $0.85 - $0.91 = -$0.06. However, since $0.10 of the $0.91 average cost is fixed cost and we are told Arthur's is operating below its full capacity, the variable cost per unit is $0.91 - $0.10 = $0.81. Therefore, for Benton's offer the profit per utensil turns positive: $0.85 - $0.81 = $0.04. The change in profit per utensil for Benton's order is therefore $0.04 - $0.05 = -$0.01. The total increase in operating profits or loss for Arthur's Company is $0.01 * 17,000 = -$170. If we choose the most similar value.

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