High School

The 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 :

If Arthur were to accept Benton's offer, their operating profits would increase by $800.

Calculate operating profit

The increase in Arthur's operating profits if they were to accept Benton's offer can be calculated as follows:

1. First, calculate the total revenue from Benton's offer: 20,000 utensils x $0.75 = $15,000

2. Next, calculate the variable costs associated with producing the 20,000 utensils: 20,000 x ($0.83 - $0.12) = $14,200

3. Subtract the variable costs from the total revenue to find the increase in operating profits: $15,000 - $14,200 = $800

Therefore, if Arthur were to accept Benton's offer, their operating profits would increase by $800.

It is important to note that fixed costs are not included in the calculation of the increase in operating profits, as they do not change based on the number of units produced. Only variable costs, which do change based on the number of units produced, are included in the calculation.

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