Pietarsaari Oy, a Finnish company, produces cross-country ski poles that it sell
ID: 2356148 • Letter: P
Question
Pietarsaari Oy, a Finnish company, produces cross-country ski poles that it sells for 31 a pair. (The Finnish unit of currency, the euro, is denoted by .) Operating at capacity, the company can produce 55,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below: Per Pair Total Direct materials 11 605,000 Direct labor 2 110,000 Variable manufacturing overhead 1 55,000 Fixed manufacturing overhead 6 330,000 Variable selling expense 2 110,000 Fixed selling expense 4 220,000 Total cost 26 1,430,000 Required: 1. The Finnish army would like to make a one-time-only purchase of 9,300 pairs of ski poles for its mountain troops. The army would pay a fixed fee of 5 per pair, and in addition it would reimburse the Pietarsaari Oy company for its unit manufacturing costs (both fixed and variable). Due to a recession, the company would otherwise produce and sell only 45,700 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 45,700 pairs or 55,000 pairs of ski poles were produced.) The company would not incur its usual variable selling expenses with this special order. If the Pietarsaari Oy company accepts the armys offer, by how much would net operating income increase or decrease from what it would be if only 45,700 pairs of ski poles were produced and sold during the year? (Input the amount as a positive value.) in net operating income 2. Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 55,000 pairs of ski poles through regular channels. Thus, accepting the armys offer would require giving up sales of 9,300 pairs at the normal price of 31 a pair. If the armys offer is accepted, by how much will net operating income increase or decrease from what it would be if the 9,300 pairs were sold through regular channels? (Input the amount as a positive value.) in net operating incomeExplanation / Answer
Var cost per ski pair are :- Direct materials €11 Direct labor 2 Var Mfg OH 1 Var Selling Exp 2 ------------------------- Total Var cost per ski pair 16 Total Fixed OH : Fixed Mfg OH 330,000 Fixed selling exp 220,000 ----------------------------- Fixed OHs 550,000 So COnt per pair = SP pu - VC pu = 31-16 = 15 1. 45700 pairs are sold. So COnt = 45700*15 = 685,500 ....(a) Less Fixed Mfg OHs 550,000 ------------------------------- Net inc for 45700 units 135,500 ...........(p) Var cost for Army order = 16-Var selling exp = 16-2 = 14 Fixed Cost pu = Fixed Mfg Cost = 6 pu SO Total Cost reimbursed = 14+6+5 (fixed fee) = 25 SO Cont pu from Army order = Total cost reimb pu - Var cost pu = 25-14 = 11 So Total Cont from Army order = 9300*11 = 102,300 ....(b) So with army order, Net Inc will increase by 102,300 ............Ans (1) 2. If 9300 Units were sold to Army, COnt from these will be 9300*11 = 102300 If 9300 units were sold in Mkt, COnt = 9300*15 = 139,500 So by selling to Army, Net Incme will decrease by 139500-102300 = -37,200 ..Ans (2)