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 3,200 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. 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

Cost Data for 25000 units Details Per Unit $ Total Amt $ Sales       175.00          4,375,000 Direct material          25.00              625,000 Direct labor          15.00              375,000 Variable overhead            5.00              125,000 Total Variable cost          45.00          1,125,000 Contribution       130.00          3,250,000 Fixed overhead          1,500,000 Total cost          2,625,000 Net Income          1,750,000 China order for units 3200 As there is excess capacity , ignoring fixed costs Details Per Unit $ Total Amt $ Sales       135.00              432,000 Direct material          25.00                80,000 Direct labor          15.00                48,000 Variable overhead            5.00                16,000 Total Variable cost          45.00              144,000 Contribution          90.00              288,000 Fixed overhead                         -   Total cost              144,000 Net Income              288,000 There will be net increase in profit by $288,000 on accepting the order, assuming fixed oH will not change.

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