Reference no: EM13555479

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 51,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

	Per Pair			Total
Direct materials		10			510,000
Direct labor		3			153,000
Variable manufacturing overhead		1			51,000
Fixed manufacturing overhead		4			204,000
Variable selling expense		2			102,000
Fixed selling expense		5			255,000
Total cost		25			1,275,000

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 4 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 41,700 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 41,700 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 army's offer, by how much would net operating income increase or decrease from what it would be if only 41,700 pairs of ski poles were produced and sold during the year? (Input the amount as a positive value..)

2. 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 army's offer would require giving up sales of 9,300 pairs at the normal price of 31 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 9,300 pairs were sold through regular channels? (Input the amount as a positive value. Omit the sign in your response.)