Question

MSI has been approached by a fourth-grade teacher from Portland about the possibility of creating a specially designed game that would be customized for her classroom and environment. The teacher would like an educational game to correspond to her classroom coverage of the history of the Pacific Northwest, and the state of Oregon in particular. MSI has not sold its products directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting.

The teacher has offered to buy 1,100 copies of the CD at a price of $6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $460. A summary of the information related to production of MSI’s current history program follows:

Direct materials	$	1.15
Direct labor		0.43
Variable manufacturing overhead		2.12
Fixed manufacturing overhead		1.90
Total cost per unit	$	5.60
Sales price per unit	$	12.00

Required:
1. Compute the incremental profit (or loss) from accepting the special order.



2. Should MSI accept the special order?

	Yes
	No

3. Suppose that the special order had been to purchase 1,100 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.



4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.)

Answer 1

1. incremental profit (or loss)
Particulars	Amount ($)	Amount ($)
Incremental revenue (1,100*$6)		$     6,600
Less: Incremental costs-
Direct material (1,100*$1.15)	$     1,265
Direct labor (1,100*$0.43)	$        473
Variable manufacturing overhead (1,100*$2.12)	$     2,332
Cost of modification	$        460	$     4,530
Incremental profit		$    2,070

2. MSI should accept the order as there is an incremental profit of $2.070.

3. incremental profit (or loss) from accepting the special order

Particulars	Amount ($)	Amount ($)
Incremental revenue (1,100*$5.50)		6,050
Less: Incremental costs-
Direct material (1,100*$1.15)	$      1,265
Direct labor (1,100*$0.43)	$          473
Variable manufacturing overhead (1,100*$2.12)	$      2,332
Cost of modification	$          460	$      4,530
Incremental profit		$    1,520

4.special order price at which MSI would be indifferent between accepting or rejecting the special order.

Cost increase per unit for special order = $460/1,100

=$0.42

special order price = $12 + $0.42

= $12.42