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 with Instructional Materials 40,000 units S 51.00 CD Only 40,000 units 34.00 Estimated demand Estimated sales price Estimated cost per unit Direct materials $ 2.75 2.00 Direct labor 9.50 13.50 Variable manufacturing overhead Fixed manufacturing overhead Unit manufacturing cost Additional development cost 9.50 10.00 12.75 10.00 S 39.00 31.00 $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 with Instructions CD Only Incremental Materials Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

Answer 1

CD with Instruction Material Incremental CD Only [40000 x $34] $ 13,60,000 [40000 x $51] $ Ans 1 Particulars 20,40,000 $ $ 11,60,000 $ 8,80,000 $ 1,05,000 $ 7,75,000 $ Sales Revenue Variable Cost Contribution Margin Additional Development cost Differential Profit/(Loss) 6,80,000 8,40,000 [40000 x $29] [40000 x $21] 3,20,000 $ $ 3,60,000 5,20,000 $ 1,05,000 5,20,000 2,55,000 MSI should add the instructional material as the differential profit is higher than CD only Ans 2 CD with Instruction Material Incremental $ 11,22,000 $ 6,38,000 $ 4,84,000 $ 1,05,000 $ 3,79,000 $1,41,000 Particulars CD Only Ans 3 [40000 x $34] [40000 x $21] $13,60,000 [22000 x $51] 8,40,000 [22000 x $29] Sales Revenue -2,38,000 Variable Cost Contribution Margin Additional Development cost Differential Profit/(Loss) $ $ -2,02,000 $ $ 5,20,000 -36,000 $ 1,05,000 5,20,000 MSI should sell the CD without instruction material because the differential profit is higher as compared to CD with instruction material only. Ans 4 Note: Since in both the cases fixed cost will remain same hence not considered in determining the differential profit/(loss)