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?

total profit = $ 800

Explanation:

given data

average cost = 0.83 per unit

Fixed Cost = 0.12 per unit

Company offered = $ 0.75 per unit

to find out

increase in AZ's operating profits

solution

we know that Variable Cost = 0.83 - 0.12 = 0.71 per unit

and profit Per unit will be

profit = 0.75 - 0.71 = 0.04 per unit

and Total Profit is here for 20000 unit

Total Profit = 0.04 * 20000

total profit = $ 800

and we know that here

for Average Fixed = 0.12 is remain constant for total production

and Company does not have any additional expenses in connection to Fixed Cost so that Variable cost have to be incurred for additional production