The AZ Company manufactures kitchen utensils.The company is currently producing well below its full capacity.The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each.AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83,of which $0.12 is fixed costs.If AZ were to accept BV's offer,what would be the increase in AZ's operating profits?

Question

Quizplus · Accepted Answer

The incremental revenue from accepting the special order would be: 
$0.75/unit x 20,000 units = $15,000 
The incremental cost would be: 
($0.83/unit - $0.71/unit) x 20,000 units = $240 
($0.83/unit is the total cost and $0.71/unit is the variable cost)

Therefore, the incremental operating profit would be: 
$15,000 - $240 - $2,400 (fixed cost allocated to the special order) = $12,360

This is an increase of $12,360 - $11,560 (operating profit without the special order) = $800.

Therefore, the best choice is B) $800.

The AZ Company Manufactures Kitchen Utensils