Problem 10-21A Accept or Reject a Special Order [LO4]

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 56,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:

	Per Pair			Total
Direct materials		10			560,000
Direct labor		2			112,000
Variable manufacturing overhead		1			56,000
Fixed manufacturing overhead		6			336,000
Variable selling expense		1			56,000
Fixed selling expense		4			224,000
Total cost		24			1,344,000

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 5 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 46,000 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 46,000 pairs or 56,000 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 46,000 pairs of ski poles were produced and sold during the year? (Input the amount as a positive value.)

(Click to select)IncreaseDecrease in net operating income

2.

Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 56,000 pairs of ski poles through regular channels. Thus, accepting the armys offer would require giving up sales of 10,000 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 10,000 pairs were sold through regular channels? (Input the amount as a positive value.)

(Click to select)IncreaseDecrease in net operating income