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Answer:
The increase in Arthur's operating profits would be <u>$1120</u>.
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:
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:
Profit per unit = $0.07.
Number of utensils = 16,000.
Now, to get the total profit we put formula:
<u><em>Total profit = Number of utensils × Profit per unit.</em></u>
Therefore, the increase in Arthur's operating profits would be $1120.