Question

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 16,000 utensils at $0.70 each. Arthur sells its utensils wholesale for $0.80 each; the average cost per unit is $0.78, of which $0.15 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

Answer 1

Answer:

The increase in Arthur's operating profits would be $1120.

Step-by-step explanation:

Given:

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 16,000 utensils at $0.70 each. Arthur sells its utensils wholesale for $0.80 each; the average cost per unit is $0.78, of which $0.15 is fixed costs.

If Arthur were to accept Benton's offer.

Now, to find the increase in Arthur's operating profits.

The average cost per unit = $0.78.

The fixed costs = $0.15.

So, to get the variable cost we subtract the fixed cost from the average cost per unit:

$0.78-0.15=0.63.$

Thus, the variable cost is $0.63.

As, the Benton Company has approached Arthur with an offer to buy 16,000 utensils at $0.70 each.

So, to get the profit per unit we subtract $0.70 from the variable cost:

$0.70-0.63=\ 0.07.$

Profit per unit = $0.07.

Number of utensils = 16,000.

Now, to get the total profit we put formula:

Total profit = Number of utensils × Profit per unit.

$Total\ profit=16,000\times 0.07\\\\ Total\ profit=\ 1120.$

Therefore, the increase in Arthur's operating profits would be $1120.