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’s first international order. On the other hand, the company in China is willing to pay only $125 per unit.

Answer 1

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 3400

As there is excess capacity , ignoring fixed cost

Details Per Unit $ Total Amt $

Sales 125.00 425,000

Direct material 25.00 85,000

Direct labor 15.00 51,000

Variable overhead 5.00 17,000

Total Variable cost 45.00 153,000

Contribution 90.00 3,06,000

Fixed overhead -

Total cost 144,000

Net Income 153,000

There will be net increase in profit