Question

E7-8 Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6]

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			41,000	units			41,000	units
Estimated sales price		$	25.00			$	52.00
Estimated cost per unit
Direct materials		$	1.50			$	1.75
Direct labor			2.00				5.00
Variable manufacturing overhead			2.00				5.25
Fixed manufacturing overhead			2.00				2.00
Unit manufacturing cost		$	7.50			$	14.00
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 (Loss)

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

	Sell the CDs without Instructional Materials
	Add the Instructional Materials

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 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 (Loss)

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

Calculation of Variable Cost per unit :-

Particulars	CD Only	CD with instruction material
Direct Material	1.50	1.75
Direct Labour	2.00	5.00
Variable Overhead	2.00	5.25
Total Variable Cost Per Unit ($)	5.50	12.00

1) All Amount in $.

Particulars	CD Only	CD with instruction material	Incremental
Sales Revenue	1025000	2132000	1107000
Less : Variable Cost	(225500)	(492000)	266500
Contribution Margin	799500	1640000	840500
Less : Additional Development Cost		(105000)	105000
Differential Margin	799500	1535000	735500

2) Add the Instruction Materials becouse Additional Contribution Margin is $735500.

3)

a) All Amount in $.

Particulars	CD Only	CD with instruction material	Incremental
Sales Revenue	1025000	1092000	67000
Less : Variable Cost	(225500)	(252000)	26500
Contribution Margin	799500	840000	40500
Less : Additional Development Cost		(105000)	105000
Differential Margin	799500	735000	(64500)

b) Sell the CDs without instruction materials becouse Contribution margin reduce by $64500.