Benjamin Company had the following results of operations for the past year: $\begin{array}{llr}
\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)\
\text {Operating income } &&\$16,000\
\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's productive capacity is 16,000 units per year and accepts the offer, its profits will:

Question

Benjamin Company had the following results of operations for the past year: $\begin{array}{llr}
  \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)\
 \text {Operating income  } &&\$16,000\
\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's productive capacity is 16,000 units per year and accepts the offer, its profits will:

Quizplus · Accepted Answer

To determine the effect of accepting the foreign company's offer, we need to calculate the incremental profit of producing and selling 4,000 units.

Revenue from selling 4,000 units at $7.50 per unit = 4,000 x $7.50 = $30,000

Variable manufacturing costs (4,000 x $1.96) = $7,840

Incremental fixed overhead = $600

Incremental selling and administrative costs = $300

Total incremental costs = $8,740

Incremental profit = $30,000 - $8,740 = $21,260

However, we also need to consider the opportunity cost of selling these 4,000 units. If Benjamin can sell all 16,000 units at $10 each, then the revenue foregone by selling 4,000 units at $7.50 each is:

Foregone revenue = 4,000 x ($10 - $7.50) = $10,000

Therefore, the net effect on profits of accepting the offer is:

Incremental profit - Foregone revenue = $21,260 - $10,000 = $11,260 decrease

Therefore, the correct answer is C, decrease by $10,900.

Benjamin Company Had the Following Results of Operations for the Past