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 51,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

1.) The Finnish army would like to make a one-time-only purchase of 9,400 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 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 41,600 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 41,600 pairs or 51,000 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 41,600 pairs of ski poles were produced and sold during the year?

2.) Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 51,000 pairs of ski poles through regular channels. Thus, accepting the armys offer would require giving up sales of 9,400 pairs at the normal price of 31 a pair. If the armys offer is accepted, by how much will net operating income increase or decrease from what it would be if the 9,400 pairs were sold through regular channels?

Per Pair Total 11 3 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 561,000 153,000 51,000 306,000 51,000 255,000 6 Total cost 27 1,377,000