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			29,000	units			29,000	units
Estimated sales price		$	25.00			$	40.00
Estimated cost per unit
Direct materials		$	3.75			$	4.25
Direct labor			5.00				8.00
Variable manufacturing overhead			5.00				8.25
Fixed manufacturing overhead			4.50				4.50
Unit manufacturing cost		$	18.25			$	25.00
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 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?

	Add the Instructional Materials
	Sell the CDs without Instructional Materials

Answer 1

Answer-1)-

Morning Sky Inc. (MSI)
Particulars	CD Only	CD with instructions Materials	Incremental
	(a)	(b)	(c=a-b)
Sales revenue	29000 units*$25 per unit=$725000	29000 units*$40 per unit=$1160000	435000
Less:- Variable costs	29000 units*$13.75 per unit=$398750	29000 units*$20.50 per unit=$594500	195750
Contribution margin	326250	565500	239250
Less-Additional Developments costs	Nil	105000	105000
Differential profit (loss)	326250	460500	134250

The profit will be increase if instructional materials were added to the CDs.

2)- MSI should add the instructional materials due to incremental profit.

3-a)-

Morning Sky Inc. (MSI)
Particulars	CD Only	CD with instructions Materials	Incremental
	(a)	(b)	(c=a-b)
Sales revenue	29000 units*$25 per unit=$725000	20000 units*$40 per unit=$800000	75000
Less:- Variable costs	29000 units*$13.75 per unit=$398750	20000 units*$20.50 per unit=$410000	11250
Contribution margin	326250	390000	63750
Less-Additional Developments costs	Nil	105000	105000
Differential profit (loss)	326250	285000	-41250

3-b)- MSI should sell the CDs without them due to incremental loss.