PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The co
ID: 2714330 • Letter: P
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 3,200 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 $130 per unit.
What will be the effect on profit of accepting the order?
Please show work.
Direct material
$625,000
Direct labor
375,000
Variable overhead
125,000
Fixed overhead
1,500,000
Total cost
$2,625,000
Explanation / Answer
Cost of accepting order = Direct material + Diret labor + variable overhead
= 625000+375000+125000
= $ 1125000
Cost per drive = 1,125,000 / 25000 =$ 45 per drive
**Fixed overhead will not be considered as it will be incurred whether offer is accepted or not
Profit = unit sol (selling price -cost)
= 3200 (130 - 45)
= 3200 * 85
= $ 272,000
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