Problem 4 - Impact on Operating Income (15 marks)

Sole Mates Clothing Ltd. manufactures socks. The Athletic Division sells its socks for $13 a pair to outsiders.

ocks have manufacturing variable and fixed costs of $3.50 and $1.25, respectively. The division's total fixed manufacturing costs are $62,500 at the normal volume of 50,000 units.

The Mountain Wear Division has offered to buy 5,000 pairs of socks at the full cost of $4.75. They can sell the socks for $15. The Athletic Division does not have excess capacity but could produce the 5,000 pairs of socks using overtime. This would increase variable costs by $0.75 per unit and fixed costs by $8,900.

Required

Determine the effect on corporate operating income if the Athletic division:

Reduces regular sales to create the needed capacity

Uses overtime to produce the 5,000 t-shirts