Benjamin Company had the following results of operations for the past year: $$\begin{array} { l r l r }
\text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \
\text { Direct materials and direct labor } & \$ 96,000 & \
\text { Overhead (20\% variable) } & 16,000 & \
\text { Selling and administrative expenses (all fixed) } & 32,000 & ( 144,000 ) \
\hline \text { Operating income } & & \$ 16,000 \
\hline
\end{array}$$
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: $$\begin{array} { l r l r } 
\text { Sales } ( 16,000 \text { units at } \$ 10 ) & &  \$ 160,000 \
\text { Direct materials and direct labor } & \$ 96,000 & \
\text { Overhead (20\% variable) } & 16,000 & \
\text { Selling and administrative expenses (all fixed) } & 32,000 & ( 144,000 ) \
\hline \text { Operating income } & & \$ 16,000 \
\hline 
\end{array}$$
 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 $10 - ($96,000/16,000) - ($16,000*20%/16,000) = $3.50. For 4,000 units, the contribution margin is $3.50 * 4,000 = $14,000. Additional fixed costs are $600 + $300 = $900. The profit increase is $14,000 - $900 = $13,100. However, since the selling price is $7.50, the contribution margin per unit for the special order is $7.50 - $6 = $1.50. For 4,000 units, the contribution margin is $1.50 * 4,000 = $6,000. The profit increase is $6,000 - $900 = $5,100. Therefore, the closest option is E) Increase by $4,300.

Benjamin Company Had the Following Results of Operations for the Past