The following information pertains
Electronic Playground, Inc. (EPI), manufactures and sells computer games. The company has several product lines based on the age range of the target market and the games marketing as educational or entertainment. EPI 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, EPI has developed and manufactured all 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. EPI 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.
Analyzing Sell-or-Process Further Decision
EPI 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 EPI’s two options follows:
| CD Only | CD with Instructional Materials |
Estimated demand | 50,000 units | 50,000 units |
Estimated sales price | $20 | $35 |
Estimated cost per unit |
|
|
Direct materials | $ 1.25 | $ 1.75 |
Direct labor | 0.50 | 4.25 |
Variable manufacturing overhead | 2.25 | 5.50 |
Fixed manufacturing overhead | 2.00 | 2.00 |
Unit manufacturing cost | $ 6.00 | $13.50 |
Additional development cost |
| $65,000 |
Required:
1.Determine whether EPI should process the educational CDs further or sell them without instructional materials. Include the difference in net profit from processing the CDs further.
2.Suppose that choosing to process the CDs further will reduce the number of units sold to 35,000. Determine the impact on EPI’s profit of the decision to process further.
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