Pietarsaari Oy, a Finnish company, produces cross-country ski poles that it sell

Question

Pietarsaari Oy, a Finnish company, produces cross-country ski poles that it sells for 32 a pair. Operating at capacity, the company can produce 51,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

The Finnish army would like to make a one-time-only purchase of 9,200 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 41,800 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 41,800 pairs or 51,000 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 41,800 pairs of ski poles were produced and sold during the year? (Input the amount as a positive value. Omit the "%u20AC" sign in your response.)

Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 51,000 pairs of ski poles through regular channels. Thus, accepting the armys offer would require giving up sales of 9,200 pairs at the normal price of 32 a pair. If the army%u2019s offer is accepted, by how much will net operating income increase or decrease from what it would be if the 9,200 pairs were sold through regular channels? (Input the amount as a positive value. Omit the "%u20AC" sign in your response.)

Per Pair Total Direct materials 8 408,000 Direct labor 3 153,000 Variable manufacturing overhead 1 51,000 Fixed manufacturing overhead 5 255,000 Variable selling expense 2 102,000 Fixed selling expense 4 204,000 Total cost 23 1,173,000

Explanation / Answer

Var cost per ski pair are :-

Direct materials 8

Direct labor 3

Var Mfg OH 1

Var Selling Exp 2

-------------------------

Total Var cost per ski pair 14

Total Fixed OH :

Fixed Mfg OH 255,000

Fixed selling exp 204,000

-----------------------------

Fixed OHs 459,000

So COnt per pair = SP pu - VC pu = 32-14 = 18

1. 41800 pairs are sold.

So COnt = 41800*18 = $752,400 ....(a)

Less Fixed Mfg OHs 459,000

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Net inc for 41800 units $293,400 ...........(b)

Var cost for Army order = 14-Var selling exp = 16-2 = 12

Fixed Cost pu = Fixed Mfg Cost pu

= 255000/51000 = 5 pu

SO Total Cost reimbursed = 12 (Var cost)+5 (Fixd Mfg oh)+5(fixed fee) = 22

SO Cont pu from Army order = Total cost reimb pu - Var cost pu = 22-12 = 10

So Total Cont from Army order

= 9200*10 = 92,000 ....(c)

So with army order, Net Inc will increase by 92,000.........Ans (1)

2. If 9200 Units were sold to Army, COnt from these will be 9200*10 = 92,000

If 9200 units were sold in Mkt, COnt = 9200*18 = $165,600

So by selling to Army, Net Incme will decrease by $165,600 -92,000 = $73,600 ..Ans (B)

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