PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The co

Question

PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was: Direct material $625,000 Direct labor 375,000 Variable overhead 125,000 Fixed overhead 1,500,000 Total cost $2,625,000 At the start of the current year, the company received an order for 3,400 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only $135 per unit. What will be the effect on profit of accepting the order?

Explanation / Answer

Ans. Profit will increase by $306000, so the order is acceptable. Current Special order Total Activity (drives) 25000 3400 Sales 4375000 459000 4834000 Less: Variable cost Direct material         (25) 625000 85000 710000 Direct labor              (15) 375000 51000 426000 Variable overhead    (5) 125000 17000 142000 Total Variable cost 1125000 153000 1278000 Contribution (sales - VC) 3250000 306000 3556000 Less: Fixed cost 1500000 0 1500000 Net Income 1750000 306000 2056000 *Variable cost per unit: Direct material        =    625000 / 25000      25 Direct labor              =    375000 / 25000 15 Variable overhead =   125000 / 25000 5 *Sales of special order or 3400 drives Sales   =   3400 * 135 = 459000 *Fixed cost will not affect by the increase in activity.

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