Question

In: Accounting

MSI’s educational products are currently sold without any supplemental materials. The company is considering the inclusion...

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

Solutions

Expert Solution

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

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