Question

Required information E7-6 through E7-10. 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. E7-9 (Algo) 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 such 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 Only 28,000 units $ 24.00 CD with Instructional Materials 28,000 units $ 39.00 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 3.75 7.50 $ 3.25 4.50 4.50 4.00 $ 16.25 7.75 4.00 $ 23.00 $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. 2. Should MSI add the instructional materials or sell the CDs without them? 3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 units. Complete the table given below based on Requirement 1 and 2 data. 3-b. Should MSI add the instructional materials or sell the CDs without them?

Answer 1

Part 1	Contribution Margin Income Statement
		CD only	CD with instructional manual	Incremental
	Sales Revenue	$              6,72,000	$                 10,92,000	$                4,20,000
	Variable Costs	$              3,43,000	$                   5,32,000	$                1,89,000
	Contribution margin	$              3,29,000	$                   5,60,000	$                2,31,000
	Additional developmental costs	$                         -	$                   1,05,000	$                1,05,000
	Differential Profit/(Loss)	$              3,29,000	$                   4,55,000	$                1,26,000
Part 2	MSI should add the instructional manual and sell them.
Part 3	Contribution Margin Income Statement
		CD only	CD with instructional manual	Incremental
	Annual Demand	28000	21000
	Sales Revenue	$              6,72,000	$                   8,19,000	$                1,47,000
	Variable Costs	$              3,43,000	$                   3,99,000	$                   56,000
	Contribution margin	$              3,29,000	$                   4,20,000	$                   91,000
	Additional developmental costs	$                         -	$                   1,05,000	$                1,05,000
	Differential Profit/(Loss)	$              3,29,000	$                   3,15,000	$                 -14,000
Part 4	MSI should sell the CDs without adding the instructional manual