MSI’s educational products are currently sold without any supplemental materials

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?

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 20,000 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?

CD Only CD with Instructional Materials Estimated demand 25,000 units 25,000 units Estimated sales price $ 21.00 $ 36.00 Estimated cost per unit Direct materials $ 1.75 $ 2.25 Direct labor 3.00 6.00 Variable manufacturing overhead 3.00 6.25 Fixed manufacturing overhead 2.50 2.50 Unit manufacturing cost $ 10.25 $ 17.00 Additional development cost $ 105,000

Explanation / Answer

Particulars CD Only CD with Instructional Materials Estimated demand 25000 25000 Estimated sales price 21 36 Estimated cost per unit: Direct materials 1.75 2.25 Direct labor 3 6 Variable manufacturing overhead 3 6.25 Fixed manufacturing overhead 2.5 2.5 Unit manufacturing cost 10.25 17.00 Additional development cost 105000 1 Comparative Analysis of Both Options: Particulars CD Only CD with Instructional Materials Incremental Estimated sales price 21 36 Less: Variable Costs: Direct materials 1.75 2.25 Direct labor 3.00 6.00 Variable manufacturing overhead 3.00 6.25 Contribution Margin PU 13.25 21.50 Estimated demand 25000 25000 Total Contribution Margin 331250 537500 206250 Less: Fixed Cost 62500 62500 0 Less: Additional D Cost 0 105000 105000 Net Income 268750 370000 101250 2 Yes, Since Company is gaining 3 Comparative Analysis of Both Options: Particulars CD Only CD with Instructional Materials Incremental Estimated sales price 21.00 36.00 Less: Variable Costs: 0.00 0.00 Direct materials 1.75 2.25 Direct labor 3.00 6.00 Variable manufacturing overhead 3.00 6.25 Contribution Margin PU 13.25 21.50 Estimated demand 25000 20000 Total Contribution Margin 331250 430000 98750 Less: Fixed Cost 62500 62500 0 Less: Additional D Cost 0 105000 105000 Net Income 268750 370000 -6250 No, Since Income has been decreased

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