Question

Benjamin Company had the following results of operations for the past year:

Sales (11,300 units at $19)				$	214,700
Direct materials and direct labor	$	56,500
Overhead (20% variable)		11,300
Selling and administrative expenses (all fixed)		13,560			(81,360	)
Operating income				$	133,340

A foreign company (whose sales will not affect Benjamin’s market) offers to buy 2,825 units at $15.20 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $960 and selling and administrative costs by $780. Assuming Benjamin’s productive capacity is 11,300 units per year and accepts the offer, its profits will:

• Decrease by $10,735.

• Decrease by $12,475.

• Decrease by $ 122,605.

• Increase by $ 8,995.

• Increase by $ 3,605.

Answer 1

Correct answer-----------Decrease by $12,475

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (2825 x $15.20)	$        42,940.00
Less: Total Additional cost due to acceptance of offer	$        55,415.00
Financial Disadvantage	$      (12,475.00)

.

Calculation of Additional Cost of Order of 2825 units
	Per Unit	Total
Direct material and labor	$                   5.00	$          14,125.00
Variable manufacturing overheads	$                   0.20	$                565.00
Loss of contribution on regular sales ((19-5-.20)*2825)	$                13.80	$          38,985.00
Additional fixed cost		$            1,740.00
Total Additional cost due to acceptance of order	$                19.00	$          55,415.00

If order is accepted then regular sales of 2825 will be lost because the company is operating at maximum capacity and there is no free capacity.