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 $135 per unit. What will be the effect on profit of accepting the order?

Answer 1

Ans.	Profit will increase by $306000, so the order is acceptable.
		Current	Special order	Total
	Activity (drives)	25000	3400
	Sales	4375000	459000	4834000
	Less: Variable cost
	Direct material         (25)	625000	85000	710000
	Direct labor              (15)	375000	51000	426000
	Variable overhead    (5)	125000	17000	142000
	Total Variable cost	1125000	153000	1278000
	Contribution (sales - VC)	3250000	306000	3556000
	Less: Fixed cost	1500000	0	1500000
	Net Income	1750000	306000	2056000
	*Variable cost per unit:
	Direct material        =    625000 / 25000			25
	Direct labor              =    375000 / 25000			15
	Variable overhead =   125000 / 25000			5
	*Sales of special order or 3400 drives
	Sales   =   3400 * 135 = 459000
	*Fixed cost will not affect by the increase in activity.