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. .