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 2,700 copies of the CD at a price of $6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $430. 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 1.08 0.31 2.23 1.90 52 $13.00 Total cost per unit Sales price per unit Required 1. Compute the incremental profit (or loss) from accepting the special order t (or Loss) by 2. Should MSI accept the special order? O Yes No 3. Suppose that the special order had been to purchase 2,700 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario t (or by

Explanation / Answer

1. Profit (or Loss) $5996 by accepting the special order.

Fixed manufacturing overheads are not considered since they remain unaffected by the acceptance or rejection of the special order and are hence irrelevant.

2. YES

MSI should accept the special order.

Selling price per unit $ 6 Variable costs: Direct materials 1.08 Direct labor 0.31 Variable overhead 2.23 Total variable costs 3.62 Contribution per unit $ 2.38 Number of copies ordered 2700 Total contribution $ 6426 Less: Cost of modifications 430 Profit on special order $ 5996

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