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PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of...

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Finance

PowerDrive, Inc. produces a hard disk drive that sells for $175per unit. The cost of producing 25,000 drives in the prior yearwas:

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 orderfor 3,800 drives from a computer company in China. Management ofPowerDrive has mixed feelings about the order. On the one hand theywelcome the order because they currently have excess capacity.Also, this is the company’s first international order. On the otherhand, the company in China is willing to pay only $135 perunit.

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

Answer & Explanation Solved by verified expert
4.3 Ratings (821 Votes)
First of all we shall calculate the companys per unit cost of producing drives as follows Direct material 625000 25000 25 per drive Direct labor 375000 25000 15 per drive Variable overhead    See Answer
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