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 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 $105,000 Required: 1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs.  CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit 2. Should MSI add the instructional materials or sell the CDs without them?  Add the Instructional Materials OR Sell the CDs without Instructional Materials 3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 18,000 units. Complete the table given below based on Requirement 1 and 2 data.  CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit 3-b. Should MSI add the instructional materials or sell the CDs without them?  Sell the CDs without Instructional Materials OR Add the Instructional Materials ## Solutions ##### Expert Solution • All working forms part of the answer • Requirement 1  CD Only CD with Instruction materials Calculation Amount ($) 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)