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 29,000 units 29,000 units
Estimated sales price 25.00 40.00
Estimated cost per unit
Direct materials 3.75 4.25
Direct labor 5.00 8.00
Variable manufacturing overhead 5.00 8.25
Fixed manufacturing overhead 4.50 4.50
Unit manufacturing cost 18.25 25.00
Additional development cost 105,000

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 Instructional Materials Incremental
Sales Revenue
Variable Cost
Contribution Margin
Additional Development Cost
Differential Profit (loss)

2. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 20,000 units. Complete the table given below based on Requirement 1 and 2 data.

CD Only CD with Instructional Materials Incremental
Sales Revenue
Variable Costs
Contribution Margin
Additional Development Cost
Differential Profit (loss)

Solutions

Expert Solution

Solution 1:

Computation of Profit - MSI Educational Products
Particulars CD Only CD with instructions materials Incremental
Sales $725,000.00 $1,160,000.00 $435,000.00
Variable costs $398,750.00 $594,500.00 $195,750.00
Contribution margin $326,250.00 $565,500.00 $239,250.00
Additional development costs $0.00 $105,000.00 $105,000.00
Differential profit (Loss) $326,250.00 $460,500.00 $134,250.00

Solution 2:

Computation of Profit - MSI Educational Products
Particulars CD Only CD with instructions materials Incremental
Sale volume 29000 20000
Sales $725,000.00 $800,000.00 $75,000.00
Variable costs $398,750.00 $410,000.00 $11,250.00
Contribution margin $326,250.00 $390,000.00 $63,750.00
Additional development costs $0.00 $105,000.00 $105,000.00
Differential profit (Loss) $326,250.00 $285,000.00 -$41,250.00

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