Question

MSI has been approached by a fourth-grade teacher from Portland about the possibility of creating a specially designed game that would be customized for her classroom and environment. The teacher would like an educational game to correspond to her classroom coverage of the history of the Pacific Northwest, and the state of Oregon in particular MSI has not sold its products directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting. The teacher has offered to buy 2,600 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $400. A summary of the Information related to production of MSI's current history program follows: Direct materials Direct labor Variable manufacturing over head Fixed sanataturing overhead Totalcatel Sales Price per unit Required: 1. Compute the incremental profit (or loss) from accepting the special order 2. Should MSI accept the special order? 3. Suppose that the special order had been to purchase 2.600 copies of the program for $150 cach. Compute the incremental profit for loss from accepting the special order under this scenario 4. Suppose that MSiis operating at full capacity to accept the special order it would have to reduce production of the history program. Compute the special order price at which MSI would be ind fferent between accepting or rejecting the special order Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the incremental proft (or loss) from accepting the special order

Answer 1

Solution 1:

Computation of incremental profit from special order - MSI
Particulars	Amount
Revenue from special order	$13,000.00
Relevant costs:
Direct material	$2,886.00
Direct labor	$1,274.00
Variable manufacturing overhead	$5,720.00
Modifications cost	$400.00
Incremental profit (loss)	$2,720.00

Solution 2:

MSI should accept the order.

Solution 3:

Computation of incremental profit from special order - MSI
Particulars	Amount
Revenue from special order	$3,900.00
Relevant costs:
Direct material	$2,886.00
Direct labor	$1,274.00
Variable manufacturing overhead	$5,720.00
Modifications cost	$400.00
Incremental profit (loss)	-$6,380.00

Solution 4:

Minimum special order price = Regular price + Modification cost per unit

= $13 + 400/2600 = $13.15 per unit