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			25,000	units			25,000	units
Estimated sales price		$	21.00			$	36.00
Estimated cost per unit
Direct materials		$	1.75			$	2.25
Direct labor			3.00				6.00
Variable manufacturing overhead			3.00				6.25
Fixed manufacturing overhead			2.50				2.50
Unit manufacturing cost		$	10.25			$	17.00
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.



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

  
3-a. 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.

  

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

Answer 1

	Particulars	CD Only	CD with Instructional Materials
	Estimated demand	25000	25000
	Estimated sales price	21	36
	Estimated cost per unit:
	Direct materials	1.75	2.25
	Direct labor	3	6
	Variable manufacturing overhead	3	6.25
	Fixed manufacturing overhead	2.5	2.5
	Unit manufacturing cost	10.25	17.00
	Additional development cost		105000
1	Comparative Analysis of Both Options:
	Particulars	CD Only	CD with Instructional Materials	Incremental
	Estimated sales price	21	36
	Less: Variable Costs:
	Direct materials	1.75	2.25
	Direct labor	3.00	6.00
	Variable manufacturing overhead	3.00	6.25
	Contribution Margin PU	13.25	21.50
	Estimated demand	25000	25000
	Total Contribution Margin	331250	537500	206250
	Less: Fixed Cost	62500	62500	0
	Less: Additional D Cost	0	105000	105000
	Net Income	268750	370000	101250
2	Yes, Since Company is gaining
3	Comparative Analysis of Both Options:
	Particulars	CD Only	CD with Instructional Materials	Incremental
	Estimated sales price	21.00	36.00
	Less: Variable Costs:	0.00	0.00
	Direct materials	1.75	2.25
	Direct labor	3.00	6.00
	Variable manufacturing overhead	3.00	6.25
	Contribution Margin PU	13.25	21.50
	Estimated demand	25000	20000
	Total Contribution Margin	331250	430000	98750
	Less: Fixed Cost	62500	62500	0
	Less: Additional D Cost	0	105000	105000
	Net Income	268750	370000	-6250
	No, Since Income has been decreased