MSI\'s educational products are currently sold without any supplemental material
ID: 2552155 • 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 MSlI's two options follows CD with Instructional CD Only 33,000 units Materials 33,000 units Estimated demand Estimated sales price Estimated cost per unit S 28.00 S 44.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead S 5.75 7.00 7.00 6.50 S 26.25 S 6.25 10.00 10.25 6.50 S 33.00 S150,000 Unit manufacturing cost Additional development cost 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. CD with Instructions Materials CD Only Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 2. Should MSI add the instructional materials or sell the CDs without them? Sell the CDs without Instructional Materials Add the Instructional MaterialsExplanation / Answer
Answer 1
Particulars
CD Only
CD with Instructions Materials
Incremental
Sales Revenue*
$ 924,000
$ 1,320,000
$ 396,000
Variable Costs**
$ 651,750
$ 874,500
$ 222,750
Contribution Margin
$ 272,250
$ 445,500
$ 173,250
Additional development cost
-
$ 150,000
$ 150,000
Differential Profit
$ 272,250
$ 295,500
$ 23,250
* Sales Revenue
CD Only =33,000 X $ 28 =$ 924,000
CD with Instructions Materials = 33,000 X $ 44 =$ 1,320,000
** Variable Costs
CD Only=33,000 X ($ 5.75 + 7.00 + 7.00) =$ 651,750
CD with Instructions Materials = 33,000 X ($6.25 + 10.00 + 10.25) =$ 874,500
Answer 2
MSI should add instructional materials because it will increase its short-term profit by $23,250*.
*= Differential Profit CD with Instructions Materials - Differential Profit CD only
= $295,500– $272,250 =$ 23,250
Answer
3 (a)
Particulars
CD Only
CD with Instructions Materials
Incremental
Sales Revenue*
$ 924,000
$ 792,000
$ 132,000
Variable Costs**
$ 651,750
$ 477,000
$ 174,750
Contribution Margin
$ 272,250
$ 315,000
$ 42,750
Additional development cost
-
$ 150,000
$ 150,000
Differential Profit
$ 272,250
$ 165,000
-$ 107,250
* Sales Revenue
CD Only =33,000 X $ 28 =$ 924,000
CD with Instructions Materials = 18,000 X $ 44 =$ 792,000
** Variable Costs
CD Only=33,000 X ($ 5.75 + 7.00 + 7.00) =$ 651,750
CD with Instructions Materials = 18,000 X ($6.25 + 10.00 + 10.25) =$ 477,000
3(b)
In this scenario, MSI should not add instructional materials and sell the CDs without instructional material because it will reduce MSI’s net income by $107,250 *.
*= Differential Profit CD with Instructions Materials - Differential Profit CD only
= $ 165,000– $272,250 = ($ 107,250)
Particulars
CD Only
CD with Instructions Materials
Incremental
Sales Revenue*
$ 924,000
$ 1,320,000
$ 396,000
Variable Costs**
$ 651,750
$ 874,500
$ 222,750
Contribution Margin
$ 272,250
$ 445,500
$ 173,250
Additional development cost
-
$ 150,000
$ 150,000
Differential Profit
$ 272,250
$ 295,500
$ 23,250
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