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 Coat $2,625,000
At the start of the current year, the company received an order for 3,000 drives from a computer company in China. Management PowerDrive has mixed feelings about the order. On 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.
What will be the effect on profit of accepting the order?
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