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 1,400 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing programs about U.S. history to accommodate the request. The modifications would cost approximately $390. A summary of the information related to production of MSI's current history program follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead S 1.08 0.49 2.10 1.80 Total cost per unit Sales price per unit $12.00 Required 1. Compute the incremental profit (or loss) from accepting the special order ofit (or Loss) by

Explanation / Answer

Ans:

Current history program:

Variable cost per unit=$3.67 per unit

Contribution margin per unit= $12-$1.08-$0.49-$2.1= $8.33 per unit

Offer:

Offered price= 1400*5=$7000

Less: additional modification cost= $390

Net receipts= $6610

Per unit net receipt= $6610/1400=$4.72

Incremental profit from accepting the order per unit = $4.72-$3.67=$1.05

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