Question

Required information (The following information applies to the questions displayed below.) Morning Sky, Inc. ( MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products. The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability 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 quest teachers. A summary of the expected costs and revenues for MSI's two options follows: CD Only 37,eee units $ 31.00 CD with Instructional Materials 37,eee units $ 48.00 $ 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 5.75 8.ee 3.ee $ 8.25 12.ee 11.25 8.50 $ 40.ee $105, eee 8.5e $ 30.25

Answer 1

Calculation of Variable Cost per unit CD Only CD with Instruction Materila Direct Material 5.75 8.25 Direct Labour 8.00 12.00 Variable Manufacturing Overheads 8.00 11.25 Variable Cost per unit 21.75 31.50 Sales Units 37000 37000 Selling Price 48 31 1. Incremental analysis with CD with Instruction Material Saels Revenue (Selling Price *Units) Varaible Cost (Variable Cost *Units) Contribution Margin Additional Development Cost Differential Profit CD with Instruction CD Only Materila 1147000 1776000 804750 1165500 342250 610500 105000 342250 505500 Incremnetal 629000 360750 268250 105000 163250 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 19,000 Units Saels Revenue (Selling Price *Units) Varaible Cost (Variable Cost *Units) Contribution Margin Additional Development Cost Differential Profit CD with Instruction CD Only Materila 1147000 912000 804750 5 98500 342250 313500 105000 342250 208500 Incremnetal -235000 -206250 -28750 105000 -133750 3. Shold MSI Add the Instructional Material (or) Sell The CD without them? Answer: Sell the CD with out Material