Problem:
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 3,800 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 $125 per unit.
Note: Provide support for your underlying principle.