Rovio Suksia, a Finnish company, produces cross-country ski poles that it sells

Question

Rovio Suksia, a Finnish company, produces cross-country ski poles that it sells for 42 a pair. (The Finnish unit of currency, the euro, is denoted by ) Operating at capacity, the company can produce 9,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below: Per Pair 12 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 108,000 45,000 27,000 45,000 27,000 18,000 Total cost 30 270,000 equired: . The Finnish army would like to make a one-time-only purchase of 1,000 pairs of ski poles for its mountain troops. The army would pay a fixed fee of 8 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 8,000 pairs of ski poles this year. Total fixed manufacturing overheacd cost would be the same whether 8,000 pairs or 9,000 pairs of ski poles were produced.) The company would not incur its usual variable selling expenses army's offer, by how much would net operating income increase or decrease from what it would be if only 8,000 pairs of ski poles were produced and sold during the year? with this special order. If Rovio Suksia accepts the ncrease in net operating income ssume the same situation as described in requirement (1) above, except that the company is already operating at capacity and could sell 9,000 pairs of ski poles through regular channels. Thus, accepting the army's offer would require giving up sales of 1,000 pairs at the normal price of 42 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 1,000 pairs were sold through regular channels? ecrease in net operating income

Explanation / Answer

1) fixed fee 8 Fixed manufacturing overhead 5 total 13 increase in income 1000*13 = 13,000 (note variable MOH is not considered as it will be incurred in producing the goods and same will be reimbursed by Army increase in net operating income 13,000 2) contribution lost selling price per unit 42 less Variable expense direct materials 12 direct labor 5 variable overhead 3 variable selling expense 3 23 contribution per unit 19 units given up 1000 total contribution lost on regular sales -19,000 income from Army order 13,000 Net disdvantage -6,000 Decrease in net operating income -6,000

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