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 $140 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

If company accept the order, Company profit will be increase by $ 342000. Therefore company should accept the order.

Answer No. Total Cost Rate per Unit Unit Produced 25000 Direct Material 625000 25.00 Direct Labor 375000 15.00 Variable Overhead 125000 5.00 ----------------- Total Variable Cost 45.00 ------------------ Sale price of order 140.00 Variable cost 45.00 ----------------- Contribution 95.00 ------------------ Unit demanded 3600 Total Profit added 3600*95 342000

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