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### PowerDrive- Inc- produces a hard disk drive that sells for \$175 per un.docx

1. 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 4,000 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 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 Solution Answer: We are given that they currently have excess capacity it means if additional units are produced then no additional cost shall be incurred. So For evaluation of proposal we need to find out the Contribution per unit. In prior year Total variable expenses were = 625000+375000+125000 = \$1125000 And units produced were 25000 Unit
2. Hence total variable cost per unit = \$1125000 / 25000 = \$45 Per unit Now if we get \$ 140 Per unit price for additional 4000 units then we shall earn a contribution per unit = \$140 - \$45 = \$95 Per unit There shall be no additional fixed cost so the incremental earnings shall be 4000 units *\$95 = \$380000 Hence Management of Power Drive should accept this proposal.
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