Question

ml 4 Pietaa Oya sh company, produces cross-country ski poles that it sells for 32 a pair. (The Finnish f currency, the euro, in denoted by Cj Operating at capacity, the company can produce 50.000 pairs of poles a year Costs associated with this level of production and sales are given below Per Pair C12 Total G00.000 150.000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total cost s0.000 250.000 100.000 200.000 C1350.000 4 27 Required 1. The Finnish army would like to make a one-time-only purchase of 10.000 pairs of ski poles for its mountain troops The army would pay a fixed fee of E4 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 40.000 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 40.000 pairs or 50.000 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 40.000 pairs of ski poles were produced and sold during the year?

Answer 1

Solution:

Let us compare both cost and revenue at 40,000 units and 50,000 units to find net operating income in both cases then will decide whether it's increased or decreased.

Costs	Total(at 40000)	per pair (at 40000)	Total(At 50000)	per pair (at 50000)
Direct material	480000	12	600000	12
Direct labour	120000	3	150000	3
Variable manufacturing overhead	40000	1	50000	1
Fixed manufacturing overhead	250000	6.25	250000	5
Variable selling expenses	80000	2	800001	1.6
Fixed selling expenses	200000	5	200000	4
Total cost	1170000	29.25	1330000	26.6
Total revenue	1280000	32	1530000​​​​​​2	30.6
Operating profit	110000	2.75	200000	4

Net operating profit is the difference between total revenue and total cost. So in this case it increased when 50000 pairs are produced instead of 40000 pairs.

1. Given that the company would not incur usual variable selling expenses with this special order, the variable selling expenses will be same for 40000 pairs and for 50000 pairs.

2. Total revenue for 50000 pairs = Total revenue of 40000 units+ Unit manufacturing costs(Direct material+Direct labour + variable manufacturing overhead+ fixed manufacturing overhead)×10000+Fixed fee@€4 per pair=1280000+(12+3+1+5)×10000+€4×10000=1280000+210000+40000=1550000.