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 31,000 units 31,000 units Estimated sales price $ 27.00 $ 42.00 Estimated cost per unit Direct materials $ 4.75 $ 5.25 Direct labor 6.00 9.00 Variable manufacturing overhead 6.00 9.25 Fixed manufacturing overhead 5.50 5.50 Unit manufacturing cost $ 22.25 $ 29.00 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? Add the Instructional Materials 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 22,000 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? Sell the CDs without Instructional Materials Add the Instructional Materials

Answer 1

1. Computation of Increase or decrease in the net profit after considering the CD with materials options:

Thus the profit will increase to 298,013 from 147,255; an increase of $150,758.

2. MSI should consider the 2nd option as there will be an increase of profit with a good amount. It should sell the CDs with instructional materials.

3. a) IF the demand comes down to 22,000 units after considering the 2nd option -

Profit per unit computed in 1 above in option 2= 13.00

Total number of units estimated to be sold =      22,000 units

Thus, total profit will be = 22,000x13 per unit = $286,000

Less : Additional cost                                        (105,000)

Net Profit                                                           181,000

Conclusion : The profit is still highter than the option of selling the CDs without instructional materials, thus the MSI should go for the 2nd option as it will earn more then.