Benjamin Company had the following results of operations for the past year: $$\begin{array} { | l | r | r | }
\hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \
\hline \text { Direct materials and direct labor } & \$ 96,000 & \
\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \
\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } & \underline { ( 144,000 )} \
\hline \text { Operating income } & & \underline { \$ 16,000 }\
\hline
\end{array}$$ A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin has excess capacity and accepts the offer, its profits will:
A) Increase by $30,000.
B) Increase by $6,000.
C) Decrease by $6,000.
D) Increase by $5,200.
E) Increase by $4,300.

Question

Benjamin Company had the following results of operations for the past year: $$\begin{array} { | l | r | r | } 
\hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \
\hline \text { Direct materials and direct labor } & \$ 96,000 & \
\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \
\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } &  \underline { ( 144,000 )} \
\hline \text { Operating income } & & \underline {  \$ 16,000 }\
\hline
\end{array}$$ A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin has excess capacity and accepts the offer, its profits will:
A) Increase by $30,000.
B) Increase by $6,000.
C) Decrease by $6,000.
D) Increase by $5,200.
E) Increase by $4,300.

Quizplus · Accepted Answer

The contribution margin per unit is $4 ($10 - $6 variable cost). For the special order, the selling price is $7.50, so the contribution margin is $1.50 per unit ($7.50 - $6). For 4,000 units, this is $6,000. Subtract the additional fixed costs ($600 + $300 = $900), resulting in a profit increase of $5,100.

Benjamin Company Had the Following Results of Operations for the Past