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 $125 per unit.

What will be the effect on profit of accepting the order?

Explanation / Answer

25000 drives Per unit 28600 units ( 25000+3600) Sales 25000@ 175 4375000 175 4825000 (25000*175+3600*125) Costs Direct Material 625000 25 715000 Direct Labor 375000 15 429000 Variable Overhead 125000 5 143000 Fixed Overhead 1500000 1500000 Total Cost 2625000 2787000 Increase in Profitability if the offer is accepted $162,000 2787000-2625000 The offer should be accepted

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.