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			40,000	units			40,000	units
Estimated sales price		$	34.00			$	51.00
Estimated cost per unit
Direct materials		$	2.00			$	2.75
Direct labor			9.50				13.50
Variable manufacturing overhead			9.50				12.75
Fixed manufacturing overhead			10.00				10.00
Unit manufacturing cost		$	31.00			$	39.00
Additional development cost						$	105,000
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. CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

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 22,000 units. Complete the table given below based on Requirement 1 and 2 data. CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 3-b. Should MSI add the instructional materials or sell the CDs without them? Add the Instructional Materials Sell the CDs without Instructional Materials

Answer 1

1. Computation of prodit/(Loss) when instructional materials were added -

	Particulars	CD only	CD with IM	Incremental
	Estimated Demand	40000	40000
	Estimated sales price	1360000	2040000	680000
less	Direct material	80000	110000	30000
	Direct Labor	380000	540000	160000
	variable manufactuirng overhead	380000	510000	130000
	Total Variable cost	840000	1160000	320000
	Contribution(Est. sales price - Total variable cost)	520000	880000	360000
	Additional development cost		105000	105000
	Fixed cost	0	105000	105000
	Differential Profit/(Loss)[Contribution - Fixed cost)	520000	775000	255000
	Return on sales (Profit/sales)	38.24%	37.99%

2. MSI should add the instructional material as profit in absolute term is much higher in that option.Return on sales is lower in the same but not much so go with the same.

3(a) Computation of incremental prodit/Loss when 22000 units sold -

	Particulars	CD only	CD with IM	Incremental
	Estimated Demand	22000	22000
	Estimated sales price	748000	1122000	374000
less	Direct material	44000	60500	16500
	Direct Labor	209000	297000	88000
	variable manufactuirng overhead	209000	280500	71500
	Total Variable cost	462000	638000	176000
	Contribution(Est. sales price - Total variable cost)	286000	484000	198000
	Additional development cost		105000	105000
	Total Fixed cost	0	105000	105000
	Differential Profit/(Loss)[Contribution - Fixed cost)	286000	379000	93000
		38.24%	33.78%

should add as profit is higher in terms of absolute terms and Return% on sales is lower in the same.

Note - In this question if total assets investment has not given therefore the precise measning can not be said.

Please comment in case of any clarification required.