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

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.