Rovio Suksia, a Finnish company, produces cross-country ski poles that it sells
ID: 2476650 • Letter: R
Question
Rovio Suksia, 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 39,000 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 5,100 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 Rovio Suksia for its unit manufacturing costs (both fixed and variable). Due to a recession, the company would otherwise produce and sell only 33,900 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 33,900 pairs or 39,000 pairs of ski poles were produced.) The company would not incur its usual variable selling expenses with this special order. If Rovio Suksia accepts the army’s offer, by how much would net operating income increase or decrease from what it would be if only 33,900 pairs of ski poles were produced and sold during the year?
Assume the same situation as described in requirement (1) above, except that the company is already operating at capacity and could sell 39,000 pairs of ski poles through regular channels. Thus, accepting the army’s offer would require giving up sales of 5,100 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 5,100 pairs were sold through regular channels?
Rovio Suksia, 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 39,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:
Explanation / Answer
1.
Total variable cost per unit for Army order = 9 + 4 + 2 = €15
Fixed cost per unit = Fixed manufacturing cost = €2 per unit
Therefore,
Per unit cost reimbursed by Army = 15 + 2 + 4 (fixed fee) = €21
Contribution per unit from Army order = Per unit cost reimbursed by Army - Variable cost per unit = 21-15 = €6
Total contribution from Army order = 5100 x 6 = €30,600
Thus, net operating income will increase by €30,600 from what it would be if only 33,900 pairs of ski poles were produced and sold during the year.
2.
If 5,100 units were sold to Army, contribution from these will be €30,600.
If 5,100 units were sold in market, contribution = 5,100 x 13 = €66,300
So by selling to Army, Net Incme will decrease by €66,300 - €30,600 = €35,700
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