Question

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 2,300 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $340. A summary of the information related to production of MSI’s current history program follows:

Direct materials	$1.21
Direct labor	$0.40
Variable manufacturing overhead	$2.23
Fixed manufacturing overhead	$2.00
Total cost per unit	$5.84
Sales price per unit	$13.00

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

Profit (or Loss) Increase by

2. Suppose that the special order had been to purchase 2,300 copies of the program for $4.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.

Profit ( or Loss) Increase by

3. 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.)

Special Order Price

Answer 1

1.Computation of incremental cost from accepting the offer:

Sales Revenue = $5

Less: Variable costs (1.21+.40+2.23+340/2300) =$4

Net gain = $1

Total units = 2300

Hence, total profits would increase by =2300*1 = $2300

Note: Fixed manufacturing overhead has not been considered since it is already appotioned.

2.Sales revenue = $4.50

Less: Variable Costs =$4

Net gain = $0.50

Total units = 2300

Hence, total profits would increase by = 2300*.50 = $1150

3. Assuming that MSI is operating at full capacity, the calculation of price would be as follows:

Profits that would be lost from 2300 units = 2300*(13-5.84) = 2300* 7.16= $16468

Add: Variable costs to produce 2300 units = 2300*(1.21+.4+2.23) = $8763

Add: Fixed cost recovered on 2300 units = 2300*2 = $4600

Add: Additional variable cost on modification =$ 340

Total = $30171

Number of units = 2300

Hence, price = 30171/2300 = $13.11

If MSI is operating at full capacity, then at $13.11, it would be indifferent between accepting or rejecting the special order.

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