The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 30,000 utensils at $0.60 each. Arthur sells its utensils wholesale for $0.70 each; the average cost per unit is $0.68, of which $0.14 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

If Arthur decides to sell the 30,000 utensils to Benton, its variable cost per unit = total average cost per unit - fixed cost per unit = $0.68 - $0.14 = $0.56

The gross margin per unit = $0.60 - $0.56 = $0.04, times 30,000 units = $1,200

Since this is a special job order, we do not include the fixed costs in the calculation, we only include the variable costs. The alternative would be not to sell the 30,000 units to Benton, which doesn't alter the fixed costs either.