MSI has been approached by a fourth-grade teacher from Portland about the possib

Question

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 2,100 copies of the CD at a price of S6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $310. A summary of the information related to production of MSI's current history program follows: $ 1.18 0.38 2.06 2.00 5.62 Direct materials Direct labor Fixed manufacturing overhead Total cost per unit Sales price per unit Required 1. Compute the incremental profit (or loss) from accepting the special order. (or Loss) 2. Should MSI accept the special order? Yes O No 3. Suppose that the special order had been to purchase 2,100 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. by

Explanation / Answer

Per unit Total 2100 Incremental revenue 6 12600 Incremental costs: Variable costs: Direct materials 1.18 2478 Direct labor 0.38 798 Variable manufacturing overhead 2.06 4326 Modification cost 310 Total Incremental costs 4636 Incremental net operating income(loss) 7964 Profit increases by $7964 2 Yes 3 Per unit Total 2100 Incremental revenue 5.5 11550 Incremental costs: Variable costs: Direct materials 1.18 2478 Direct labor 0.38 798 Variable manufacturing overhead 2.06 4326 Modification cost 310 Total Incremental costs 4636 Incremental net operating income(loss) 6914 Profit increases by $6914 4 Special order price=12+(310/2100)= $12.15

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