Question

MSI’s educational products are currently sold without any supplemental materials. The company is considering the inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom bulletin board materials for teachers. A summary of the expected costs and revenues for MSI’s two options follows:

	CD Only				CD with Instructional Materials
Estimated demand			33,000	units			33,000	units
Estimated sales price		$	28.00			$	44.00
Estimated cost per unit
Direct materials		$	5.75			$	6.25
Direct labor			7.00				10.00
Variable manufacturing overhead			7.00				10.25
Fixed manufacturing overhead			6.50				6.50
Unit manufacturing cost		$	26.25			$	33.00
Additional development cost						$	150,000

  
Required:
1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs.



2. Should MSI add the instructional materials or sell the CDs without them?

	Sell the CDs without Instructional Materials
	Add the Instructional Materials

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 18,000 units. Complete the table given below based on Requirement 1 and 2 data.



3-b. Should MSI add the instructional materials or sell the CDs without them?

	Sell the CDs without Instructional Materials
	Add the Instructional Materials

Answer 1

	1		CD Only	CD with instructions materials	Incremental
		Sales Revenue (Expected Demand*Sales Price)	924000	1452000	528000
		Variable Costs	651750	874500	222750
		Contribution Margin	272250	577500	305250
		Additional Development Costs	0	$150,000	$150,000
		Differential Profit	272250	427500	$155,250
		CD Variable costs per unit	(5.75+7+7)	19.75
		CD with instructional materials Variable costs per unit	(6.25+10+10.25)	26.5
	2	Since adding CD with instructions materials will increase the profit by $ 155250, MSI should add the instructional materials
			CD Only	CD with instructions materials	Incremental
	3	Sales Revenue (Expected Demand*Sales Price)	924000	792000	-132000
		Variable Costs	651750	477000	-174750
		Contribution Margin	272250	315000	42750
		Additional Development Costs	0	$150,000	$150,000
		Differential Profit	272250	165000	($107,250)
	3b	The CD only expected demand would remain same as there would be no changes, only CD with instructions materials demand would change to 18000 units due to higher selling price
		This will lead to decrease in profits by $ 107250 and therefore, MSI should sell the CDs without instructed materials