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			42,000	units			42,000	units
Estimated sales price		$	26.00			$	53.00
Estimated cost per unit
Direct materials		$	2.00			$	2.25
Direct labor			2.50				5.50
Variable manufacturing overhead			2.50				5.75
Fixed manufacturing overhead			2.50				2.50
Unit manufacturing cost		$	9.50			$	16.00
Additional development cost						$	125,000

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?

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.

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

Answer 1