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 36,000 units 36,000 units Estimated sales price $ 30.00 $ 47.00 Estimated cost per unit Direct materials $ 5.25 $ 7.75 Direct labor 7.50 11.50 Variable manufacturing overhead 7.50 10.75 Fixed manufacturing overhead 8.00 8.00 Unit manufacturing cost $ 28.25 $ 38.00 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 18,000 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

Assumption: As nothing is cleared in question format, it has been assumed that the additional Development cost is incurred in option of CD with instruction material only.

The Above calculations are done as follows:

Answer2: As there is incremental profit it should add the instrumental material

Answer 3-a:

The Above calculations are done as follows:

Answer3-b:  As there is incremental loss MSI should sell the CDs without instructional material.