Question

Benjamin Company had the following results of operations for the past year:Sales (16,000 units at $10.25) $164,000Direct materials and direct labor $100,000 Overhead (20% variable) 20,000 Selling and administrative expenses (all fixed) 32,500 (152,500)Operating income $11,500A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,500 units at $8.05 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $650 and selling and administrative costs by $350. If Benjamin accepts the offer, its profits will:A. Increase by $5,975.B. Increase by $8,100.C. Increase by $36,225.D. Increase by $6,975.E. Decease by $8,100.

Answer 1

Answer:

Profit will increase by 5,975

Explanation:

From past year we can see that total variable cost will be:

Direct Material+Direct Labor+Variable Over head.

Total Variable Cost =100,000+20% of 20,000

Total Variable costs = 100,000+4000= 104,000

Per Unit Variable cost = Total Variable cost/Total Unit Produced

Per Unit Variable Cost = 104,000/16,000 = 6.5

If Benjamin accepts the offer results will be:

Sale (4,500*8.05) 36,225

Variable Cost (4,500*6.5) (29,250)

Incremental Fixed cost (650)

Incremental admin

and selling cost (350)

Operating Income 5,975

Answer 2

Answer: The answer is D increase by $6,975

Explanation:

Income statement

$

Revenue (16,000 × 10.25) 164,000

Direct Material 164,000

Direct Labour. 100,000

---------

Prime Cost 264,000

Overhead

Variable overhead 20,000

Selling &Administrative(fixed) 32,500

----------

52,500

Total Cost. 316,500

-------------

Operating income. (152,500)

----------------

Allocation of overhead cost on the basis of direct labour

$

Direct Labour. 100,000

Variable overhead( 0.2 × 20,000) 4,000

-----------

Total overhead. 104,000

---------------

Direct Labour = Total overhead / Total production

= 104,000/16,000

= 6.5

These variable cost is a relevant cost, we can now compare the estimated relevant cost with the relevant revenue if the order is accepted

$

Additional Revenue (4,500 × 8.05) 36,225

Less: unit purchased (4,500 × 6.5) 29,250

----------------

Excess of revenue over cost. 6,975

-------------------

Therefore the profit will be increased by $6,975