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 company’s first international order. On the other hand, the company in China is willing to pay only $130 per unit. What will be the effect on profit of accepting the order? 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

Solution -

So we can see that the Total Variable Cost per unit is 45 so even if we accept the order where the company in China is willing to pay only $130 per unit we still make a contribution of ( 130 - 45 ) = 85 per unit

So total Profit in accepting the order is 85 x 3800 = $323000

Particular Current Current Per unit Cost A Production 25000 B Selling Price Per Unit 175 175 C Total Sales ( B X A ) 4375000 D Direct material 625000 25 E Direct Labour 375000 15 F Variable Overheads 125000 5 G Total Variable Cost ( D +E +F ) 1125000 45 H Contribution (C-G) 3250000 130 I fixed OVerheads 26,25,000 J Profit ( H - I ) 625000

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