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 sych 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 32,000 units $ 43.00 CD Only 32,000 units $ 28.00 Estimated demand Estimated sales price Estimated cost per unit Direct materials Direct labor Variable manufacturing overhead, Fixed manufacturing overhead Unit manufacturing cost Additional development cost S 5.25 $ 5.75 9.50 9.75 6.50 6.50 6.00 6.00 $ 24.25 $ 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 Materials CD Only Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

Answer 1

1.Based on the given data , computation of incrdecrease of profit that would resulted if the introductional materials were added :

	CD only	CD with instruction materials	increament
Sales revenue (unit sold x selling price per unit)	$8,96,000	13,76,000	increase
Varialble cost (unit sold x variable cost per unit) Variable cost(CD) = total cost - fixed cost = 24.25 - 6 = 18.25 Varuable cost (CD with i ) = 31 - 6= 25	5,84,000	8,00,000	increase
Contribution margin (sales - variable cost)	3,12,000	5,76,000	increase
Additional devolopment cost	nil	1,05,000	increase
Differantial profit (loss) (Contribution - additional devp. Cost)	3,12,000	4,71,000	increase

Note * here sums is silent about fixed cost so we don't deduct fixed cost from here .

2.answer) MSI should add the instruction materials with cd because it increases the profit of MSI .

3(a). When cd with instruction material demamd decreased to 22,000 units :

	CD only (32000 unit)	CD with increment materials(22000 unit)	incremental
Sales revenue	$8,96,000	9,46,000	increase
Variable cost	5,84,000	5,50,000	decrease
Contribution margin	3,12,000	3,96,000	increase
Additional devolopment cost	nil	105000 (let it is a fixed cost)	increase
Differential profit (loss)	3,12,000	2,91,000	decrease

Note* all fomulla and calculation relating variablse cost of both CD and CD with instraction materials are remain same as do in question 1.

3.b) answer) Here , MSI should sell only CDs because if the company sell cds with instruction materials , it decreased the profit of the firm .