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, potental 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 42.000 units $ 26.00 CD with Instructional Malerials 42,000 units $ 53.00 Estimated demand Estimated sales price Estimated cost per unit Direct materials Direct labor Variable manufacturing overhead Foxed manufacturing overhead Unit manufacturing cost Additional development cost $ 2.00 2.50 2.50 2.50 $9.50 2.25 5.50 5.75 2.50 $ 16.00 $125,000 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 Diferential Proft (Loss) 2. Should MSI add the instructional materials or sell the CDs without them? Sell the CDs without Instructional Materials Add the Instructional Materials

Answer 1

Calculation of Variable Cost per unit CD Only CD with Instruction Materila Direct Material 2.00 2.25 Direct Labour 2.50 5.50 Variable Manufacturing Overheads Variable Cost per unit Sales Units Selling Price 2.50 5.75 13.50 7.00 42000 42000 53 26 1. Incremental analysis with CD with Instruction Material CD with Instruction CD Only Materila Incremnetal Saels Revenue (Selling Price *Units) Varaible Cost Variable Cost *Units) Contribution Margin Additional Development Cost Differential Profit 1092000 2226000 1134000 567000 294000 273000 1659000 798000 861000 125000 125000 0 1534000 798000 736000

2. Shold MSI Add the Instructional Material (or) Sell The CD without them? Answer : ADD the Instructional Material 3. IF the Higher Price of the CD with Intruction Materila Sales Reduce to 22,000 Units CD with Instruction CD Only Materila Incremnetal Saels Revenue (Selling Price *Units) Varaible Cost (Variable Cost *Units) Contribution Margin Additional Development Cost Differential Profit 1092000 1166000 74000 294000 297000 3000 798000 869000 71000 125000 125000 0 798000 744000 -54000 3. Shold MSI Add the Instructional Material (or) Sell The CD without them? Answer : Sell the CD with out Material