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 3,800 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 companys 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

Variable costs incurred in producing 25,000 units the previous year = total costs - fixed costs = 2,625,000 - 1,500,000 = 1,125,000

Variable cost/unit = 1,125,000 / 25,000 = $ 45

In accepting the special order, the company will incur only the variable costs.

So profit per unit = selling price - variable price = 135 - 45 = $ 90

So total profit = profit per unit * number of units = 90 * 3,800 = 342,000

Answer: Effect on profit = $ 342,000

Hope this helped ! Let me know in case of any queries.

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