Reference no: EM13913081

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 60,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

Total Direct materials 9 per pair 540,000

Direct labor 2 per pair 120,000

Variable manufacturing overhead 1 per pair 60,000

Fixed manufacturing overhead 3 per pair 180,000

Variable selling expense 1 per pair 60,000

Fixed selling expense 4 per pair 240,000

Total cost 20 per pair 1,200,000

Required: 1. The Finnish army would like to make a one-time-only purchase of 9,800 pairs of ski poles for its mountain troops. The army would pay a fixed fee 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 50,200 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 50,200 pairs or 60,000 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 50,200 pairs of ski poles were produced and sold during the year?

Incremental revenue:

Fixed Fee: 39,200

Reimbursement for costs of production:

Total Incremental revenue:

Variable production Costs:

Increase (decrease) in Net operating income:

Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 60,000 pairs of ski poles through regular channels. Thus, accepting the army?s offer would require giving up sales of 9,800 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 9,800 pairs were sold through regular channels?

Sales Rev. through reg. channels:

Sales Rev. from the army:

Increase(decrease) in revenue received :

Less Variable selling expenses avoided if army's offer is accepted:

 

Net Increase(decrease) in net operating income with army's offer: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 60,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

Total Direct materials 9 per pair 540,000

Direct labor 2 per pair 120,000

Variable manufacturing overhead 1 per pair 60,000

Fixed manufacturing overhead 3 per pair 180,000

Variable selling expense 1 per pair 60,000

Fixed selling expense 4 per pair 240,000

Total cost 20 per pair 1,200,000

Required: 1. The Finnish army would like to make a one-time-only purchase of 9,800 pairs of ski poles for its mountain troops. The army would pay a fixed fee 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 50,200 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 50,200 pairs or 60,000 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 50,200 pairs of ski poles were produced and sold during the year?

Incremental revenue:

Fixed Fee: 39,200

Reimbursement for costs of production:

Total Incremental revenue:

Variable production Costs:

Increase (decrease) in Net operating income:

Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 60,000 pairs of ski poles through regular channels. Thus, accepting the arm offer would require giving up sales of 9,800 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 9,800 pairs were sold through regular channels?

Sales Rev. through reg. channels:

Sales Rev. from the army:

Increase(decrease) in revenue received :

Less Variable selling expenses avoided if army's offer is accepted:

Net Increase(decrease) in net operating income with army's offer: