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

2. Should MSI add the instructional materials or sell the CDs without them?

	Add the Instructional Materials OR
	Sell the CDs without 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

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

	Sell the CDs without Instructional Materials OR
	Add the Instructional Materials

Answer 1

• All working forms part of the answer
• Requirement 1

	CD Only		CD with Instruction materials
	Calculation	Amount ($)	Calculation	Amount ($)	Incremental
Sales Revenue	[36000 x 30]	1080000	[36000 x 47]	1692000	$612000
Variable costs	[36000 x (5.25+7.5+7.5)]	729000	[36000 x (7.75+11.5+10.75)]	1080000	$351000
Contribution margin		351000		612000	$261000
Additional Development costs	None will occur	0	[given]	105000	$105000
Differential Profit (Loss)		351000		507000	$156,000

• Requirement 2

Option -1 Add the Instructional Materials, as it is Increasing the Net Income by $156,000

• Requirement 3

	CD Only		CD with Instruction materials
	Calculation	Amount ($)	Calculation	Amount ($)	Incremental
Sales Revenue	[36000 x 30]	1080000	[18000 x 47]	846000	$-234000
Variable costs	[36000 x (5.25+7.5+7.5)]	729000	[18000 x (7.75+11.5+10.75)]	540000	$-189000
Contribution margin		351000		306000	$-45000
Additional Development costs	None will occur	0	[given]	105000	$105000
Differential Profit (Loss)		351000		201000	$(150000)

• Requirement 3 (b)

Option 1: Sell the CDs without Instructional Materials as it is decreasing Net Income by $150,000