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			38,000	units			38,000	units
Estimated sales price		$	33.00			$	49.00
Estimated cost per unit
Direct materials		$	6.25			$	8.75
Direct labor			8.50				12.50
Variable manufacturing overhead			8.50				11.75
Fixed manufacturing overhead			9.00				9.00
Unit manufacturing cost		$	32.25			$	42.00
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?

	Sell the CDs without Instructional Materials
	Add the Instructional Materials

Answer 1

Solution 1:

Computation of Profit - MSI Educational Products
Particulars	CD Only	CD with instructions materials
Sales	$1,254,000.00	$1,862,000.00
Manufacturing Costs	$1,225,500.00	$1,596,000.00
Additional development cost	$0.00	$105,000.00
Profit	$28,500.00	$161,000.00

Increase in profit that would result if instructional materials were added to the CDs = $161,000 - $28,500 = $132,500

Solution 2:

MSI should add the instruction material.

Solution 3a:

Variable manufacturing cost per unit - CD Only = $6.25 + $8.50 + $8.50 = $23.25

Variable manufacturing cost per unit - CD with instruction materials = $8.75 + $12.50 + $11.75 = $33

Fixed manufacturing overhead = 38000*$9 = $342,000

Computation of Profit - MSI Educational Products
Particulars	CD Only	CD with instructions materials
Sale volume	38000	20000
Sales	$1,254,000.00	$980,000.00
Variable manufacturing costs	$883,500.00	$660,000.00
Fixed manufacturing costs	$342,000.00	$342,000.00
Additional development cost	$0.00	$105,000.00
Profit	$28,500.00	-$127,000.00

Solution 3b:

As there is loss on adding instruction material, therefore MSI should Sell the CDs without Instructional Materials