Question

(Morning Sky Inc.) 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 2,100 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 $410. A summary of the information related to production of MSI’s current history program follows:

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

Direct materials $1.16

Direct labor 0.44

Variable manufacturing overhead 2.07

Fixed manufacturing overhead 1.90

Total cost per unit $5.57

Sales price per unit $13.00

2. Should MSI accept the special order? Yes No

3. Suppose that the special order had been to purchase 2,100 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.)

Please answer every part step-by-step especially to the end!

Answer 1

Req1.
Incremental profit/(loss)
Incremental revenue (2100*6)			12600
Less: Incremental cost
Material			2436
Labour			924
Oh			4347
Modification cost			410
Incremental income			4483
Req 2: Yes, the special order must be accepted
Req 3:
Incremental profit/(loss)
Incremental revenue (2100*5.5)			11550
Less: Incremental cost
Material			2436
Labour			924
Oh			4347
Modification cost			410
Incremental income			3433
Req 4:
Contribution margin per unit frm regular sale: 13-1.16-0.44-2.07 = 9.33
Price to be offered for special order:
Total cost of 2100 units:
Material				2436
Labour				924
Oh				4347
Modification cost				410
Total cost of 2100 units:				8117
Cost per unit (8117/2100)				3.87
Add: Loss of Contribution frm regular sales				9.33
Special order offer price				13.2