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 3,600 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 $140 per unit. What will be the effect on profit of accepting the order?

Explanation / Answer

Per unit Total 3600 Incremental revenue 140 504000 Incremental costs: Direct materials 25 90000 Direct labor 15 54000 Variable manufacturing overhead 5 18000 Total Incremental costs 162000 Incremental net operating income(loss) 342000 Profit increases by $342000

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