Question

Benjamin Company had the following results of operations for the past year: $ 157,600 Sales (16,000 units at $9.85) Direct materials and direct labor Overhead (20% variable) Selling and administrative expenses (all fixed) Operating income $93,600 13,600 31,700 (138,900) $ 18,700 A foreign company (whose sales will not affect Benjamin's market) offers to buy 3,700 units at $7.17 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $570 and selling and administrative costs by $270. Assuming Benjamin has excess capacity and accepts the offer, its profits will:

Answer 1

Answer :- Calculation of the Profit if Benjamin accept the offer :-

Direct Material and Direct labor per unit=$93,600/16,000=$5.85

Relevant Variable Overhead = $13,600 * 20% = $2,720

Relevant Variable Cost per unit = $2,720 / 16,000 = $0.17

Total Relevant Variable cost per unit = $5.85 + $0.17 = $6.02

Relevant Contribution Margin per unit = $7.17 - $6.02 = $1.15

Total Contribution = 3,700 * $1.15 = $4,255

Profit = Contribution - Fixed Cost

Profit = $4,255 - $570 - $270

Profit = $3,415

So the correct answer is option E. ( $3,415).

Working :-

Selling and administrative expenses are all fixed and will not change due to change in production. So these costs will be ignored.

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