Rovio Suksia, a Finnish company, produces cross-country ski poles that it sells
ID: 2559522 • Letter: R
Question
Rovio Suksia, a Finnish company, produces cross-country ski poles that it sells for 29 a pair. (The Finnish unit of currency, the euro, is denoted by ) Operating at capacity, the company can produce 47,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below: Per Pai Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 8 2 376,000 94,000 47,000 141,000 94,000 141,000 2 Total cost 19 893,000 Required 1. The Finnish army would like to make a one-time-only purchase of 7,100 pairs of ski poles for its mountain troops. The army would pay a fixed fee of 7 Suksia for its unit manufacturing costs (both fixed and variable). Due to a recession, the company would otherwise produce and sell only 39,900 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 39,900 pairs or 47,000 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 39,900 pairs of ski poles were produced and sold during the year? per pair, and in addition it would reimburse Rovio in net operating incomeExplanation / Answer
1.
Profit per pair = 10
If army offer is not accepted, profit = (29-8-2-1-2)39900 - 141000 - 141000 = 356400
If army offer is accepted, profit = profit from outside sales + profit from army sales = 356400+170400= 526800
Profit from outside sales = 356400 (as calculated above)
Profit from army sales = 7(7100) + (19-2)(7100) = 49700+120700=170400
Increase in net operating income will be 170400
2.
Opportunity cost of 7100 outside sales = (29-8-2-1-2)7100 = 113600
Profit from army sales = 170400
Net Increase = (170400-113600)= 56800
Increase in net operating income 56800
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