Pietarsaari O_y, a Finnish company, produces cross-country ski poles that it sel
ID: 2497642 • Letter: P
Question
Pietarsaari O_y, a Finnish company, produces cross-country ski poles that it sells for 34 a pair. (The Finnish unit of currency, the euro, is denoted by ) Operating at capacity, the company can produce 52,000 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 9,900 pairs of ski poles for its mountain troops. The army would pay a fixed fee of 6 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 42,100 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 42,100 pairs or 52,000 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 army's offer, by how much would net operating income increase or decrease from what it would be if only 42,100 pairs of ski poles were produced and sold during the year? (Input the amount as a positive value. Omit the 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 52,000 pairs of ski poles through regular channels. Thus, accepting the army's offer would require giving up sales of 9.900 pairs at the normal price of 34 a pair. If the army's offer is accepted, by how much will net operating income increase or decrease from what it would be if the 9,900 pairs were sold through regular channels? (Input the amount as a positive value. Omit the sign in your response.)Explanation / Answer
1)
As there is recession and the company has spare capacity, there will be no loss of contribution on account of accepting the offer from army. No additional fixed cost will have to be incurred for 9900 pairs of ski polls. Moreover the variable selling expenses will not be incurred for this order.
Thus Variable manufacturing cost (direct labour + direct material + variable manufacturing cost) is the only relevant cost that has to be considred for the production of 9900 pairs of ski.
Total relevant manufacturing cost = 10 + 3 + 1 = $14 per pair
Total relevant cost of manufacturing 9900 pairs = 14 x 9900 = $138600.
The fixed fees that will be received from the army = 9900 x $6 = $59400
The amount that would be reimbursed by the army per pair of the ski
= Variable manufacturing cost per ski + fixed manufacturing cost per ski
= $14 + $4 = $ 18/ ski
So total reimbursement = $18 x 9900 = $178200
Thus if the company accepts the offer,
it's profit will increase by $99000.
2)
Loss from reduced sale through regular channel = 572000 - 393800 = $178200
Incremental profit on accepting the army offer = $99000
Less: Loss from reduced sale through regular channel = $178200
Incremental loss on accepting the offer from army = $79200
so income will be reduced by $79200
Profit from sale of 9900 units to army ($) Fixed price received 6 59400 Manufacturing cost reimbursed 18 178200 total amount received 237600 Less: cost incurred: variable manufacturing cost 14 -138600 Net increase in income 99000