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 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

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Special Order Analysis

The profits will increase by $323000 if the special order is accepted.

Notes:

Fixed costs will not be considered in the calculations, since the firm has excess capacity.

Thanks.

Increment Sales Value (3400*140) 476000 Less Variable Costs Direct material (3400*625000/25000) 85000 Direct Labor (3400*375000/25000) 51000 Variable overhead (3400*125000/25000) 17000 Incremental Income 323000

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