Exercise 8-6

PowerDrive, Inc., produces a hard disk drive that sells for $179 per unit. The cost of producing 25,000 drives in the prior year was:

Direct material	$	700,000
Direct labor	475,000
Variable overhead	225,000
Fixed overhead	1,500,000
Total cost	$	2,900,000

At the start of the current year, the company received an order for 2,900 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On one hand, they welcome the order because they currently have excess capacity. Also, this is the companys first international order. On the other hand, the company in China is willing to pay only $116 per unit.

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

Will profit increase or decrease? By how much?