In: Accounting
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 1,700 copies of the CD at a price of
$6.00 each. MSI could easily modify one of its existing educational
programs about U.S. history to accommodate the request. The
modifications would cost approximately $500. A summary of the
information related to production of MSI’s current history program
follows:
Direct materials | $ | 1.15 |
Direct labor | 0.39 | |
Variable manufacturing overhead | 2.08 | |
Fixed manufacturing overhead | 1.80 | |
Total cost per unit | $ | 5.42 |
Sales price per unit | $ | 12.00 |
Required:
1. Compute the incremental profit (or loss) from accepting
the special order.
2. Should MSI accept the special order?
Yes | |
No |
3. Suppose that the special order had been to
purchase 1,700 copies of the program for $5.50 each. Compute the
incremental profit (or loss) from accepting the special order under
this scenario.
4. 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.)
Answer 1. | ||||
Statement of Incremental Profit | ||||
If Special Order is Accepted | ||||
Incremental Income | ||||
Sales Revenue - 1,700 Nos X $6 | 10,200.00 | |||
Incremental Cost: | ||||
Direct Materials - 1,700 Nos X $1.15 | 1,955.00 | |||
Direct Labor - 1,700 Nos X $0.39 | 663.00 | |||
Variable MOH - 1,700 Nos X $2.08 | 3,536.00 | |||
Modification Costs | 500.00 | 6,654.00 | ||
Incremental Profit (Loss) | 3,546.00 | |||
Answer 2. | ||||
Yes, MSI should accept the Order. | ||||
Answer 3. | ||||
Statement of Incremental Profit | ||||
If Special Order is Accepted | ||||
Incremental Income | ||||
Sales Revenue - 1,700 Nos X $5.50 | 9,350.00 | |||
Incremental Cost: | ||||
Direct Materials - 1,700 Nos X $1.15 | 1,955.00 | |||
Direct Labor - 1,700 Nos X $0.39 | 663.00 | |||
Variable MOH - 1,700 Nos X $2.08 | 3,536.00 | |||
Modification Costs | 500.00 | 6,654.00 | ||
Incremental Profit (Loss) | 2,696.00 | |||
Answer 4. | ||||
Special order Price per Unit = Incremental Cost + Contribution Lost per Unit | ||||
Incremental Cost = $6,654 / 1,700 Units = $3.91 per unit (Approx.) | ||||
Contribution Lost per Unit = $12 - ($1.15 + $0.39 + $2.08) | ||||
Contribution Lost per Unit = $8.38 per unit | ||||
Special order Price per Unit = $3.91 + $8.38 | ||||
Special order Price per Unit = $12.29 per unit |