MSI’s educational products are currently sold without any supplemental materials
ID: 2517516 • Letter: M
Question
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:
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?
Add the Instructional Materials
OR
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 18,000 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?
Sell the CDs without Instructional Materials
OR
CD Only CD with Instructional Materials Estimated demand 36,000 units 36,000 units Estimated sales price $ 30.00 $ 47.00 Estimated cost per unit Direct materials $ 5.25 $ 7.75 Direct labor 7.50 11.50 Variable manufacturing overhead 7.50 10.75 Fixed manufacturing overhead 8.00 8.00 Unit manufacturing cost $ 28.25 $ 38.00 Additional development cost $ 105,000Explanation / Answer
Answer
CD Only
CD with Instruction materials
Calculation
Amount ($)
Calculation
Amount ($)
Incremental
Sales Revenue
[36000 x 30]
1080000
[36000 x 47]
1692000
$612000
Variable costs
[36000 x (5.25+7.5+7.5)]
729000
[36000 x (7.75+11.5+10.75)]
1080000
$351000
Contribution margin
351000
612000
$261000
Additional Development costs
None will occur
0
[given]
105000
$105000
Differential Profit (Loss)
351000
507000
$156,000
Option -1 Add the Instructional Materials, as it is Increasing the Net Income by $156,000
CD Only
CD with Instruction materials
Calculation
Amount ($)
Calculation
Amount ($)
Incremental
Sales Revenue
[36000 x 30]
1080000
[18000 x 47]
846000
$-234000
Variable costs
[36000 x (5.25+7.5+7.5)]
729000
[18000 x (7.75+11.5+10.75)]
540000
$-189000
Contribution margin
351000
306000
$-45000
Additional Development costs
None will occur
0
[given]
105000
$105000
Differential Profit (Loss)
351000
201000
$(150000)
Option 1: Sell the CDs without Instructional Materials as it is decreasing Net Income by $150,000
CD Only
CD with Instruction materials
Calculation
Amount ($)
Calculation
Amount ($)
Incremental
Sales Revenue
[36000 x 30]
1080000
[36000 x 47]
1692000
$612000
Variable costs
[36000 x (5.25+7.5+7.5)]
729000
[36000 x (7.75+11.5+10.75)]
1080000
$351000
Contribution margin
351000
612000
$261000
Additional Development costs
None will occur
0
[given]
105000
$105000
Differential Profit (Loss)
351000
507000
$156,000
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