Question

E7-5 Analyzing Special-Order Decision [LO 7-2, 7-3] 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 1,000 copies of the CD at a price of $5 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $500. A summary of the information related to production of MSI's current history program follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit Sales price per unit $ 1.50 0.60 2.25 2.00 $ 6.35 $12.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order. Profit (or Loss) 2. Should MSI accept the special order? Yes Ο Νο 3. Suppose that the special order had been to purchase 1,000 copies of the program for $4.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. Profit (or Loss) by

Answer 1

Solution 1:

Computation of incremental profit from special order - MSI
Particulars	Amount
Revenue from special order	$5,000.00
Relevant costs:
Direct material	$1,500.00
Direct labor	$600.00
Variable manufacturing overhead	$2,250.00
Modifications cost	$500.00
Incremental profit (loss)	$150.00

Solution 2:

MSI should accept the special order.

Solution 3:

Computation of incremental profit from special order - MSI
Particulars	Amount
Revenue from special order	$4,500.00
Relevant costs:
Direct material	$1,500.00
Direct labor	$600.00
Variable manufacturing overhead	$2,250.00
Modifications cost	$500.00
Incremental profit (loss)	-$350.00

Profit (Loss) will decrease by $350 from accepting the special order.

Solution 4:

Special order price = Regular price + Modification cost per unit = $12 + ($500 / 1000) = $12.50 per unit