The Lemaire Company manufactures wiring tools.The company is currently producing well below its full capacity.The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at $1.75 each.Lemaire sells its tools wholesale for $1.85 each;the average cost per unit is $1.83,of which $0.27 is fixed costs.If Lemaire were to accept Boisvert's offer,what would be the increase in Lemaire's operating profits?
A)$800.
B)$1,000.
C)$1,900.
D)$2,900.

Question

Quizplus · Accepted Answer

If Lemaire were to sell 10,000 tools to Boisvert, the revenue earned would be:

10,000 tools x $1.75 per tool = $17,500

The incremental revenue earned by Lemaire from selling 10,000 tools at wholesale price would be:

10,000 tools x ($1.85 - $1.83) per tool = $200

However, Lemaire would be foregoing the fixed cost of $0.27 per unit if it were to sell to Boisvert instead of selling at wholesale price. Therefore, the opportunity cost of selling to Boisvert would be:

10,000 tools x $0.27 per tool = $2,700

Thus, the increase in Lemaire's operating profits would be:

Incremental revenue - Opportunity cost = $200 - $2,700 = -$2,500

Since the increase in operating profit is negative, Lemaire should not accept Boisvert's offer. Therefore, the answer is C.

The Lemaire Company Manufactures Wiring Tools