MSI\'s educational products are currently sold without any supplemental material

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 CD with Instructional CD Only 50,000 units Materials 50,000 units Estimated demand Estimated sales price Estimated cost per unit S 20.00 $ 35.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead S 1.25 2.50 2.50 2.00 $ 8.25 $ 1.75 5.50 5.75 2.00 $15.00 $65,000 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 Only CD with Instructions Materials 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? O Add the Instructional Materials O Sell the CDs without Instructional Materials 3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 32,000 units. Complete the table given below based on Requirement 1 and 2 data. CD with Instructions Materials CD Only Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 3-b. Should MSI add the instructional materials or sell the CDs without them? O Sell the CDs without Instructional Materials O Add the Instructional Materials

Explanation / Answer

Req 1: Differential Analysis CD Only CD with Incremental Insttruction Sales revenue 1000000 1750000 750000 Vvariable cost 312500 650000 -337500 Contribution margin 687500 1100000 412500 Additional development cost 0 65000 -65000 Differential Profit (loss) 687500 1035000 347500 MSI should Add the instruction Manual Req 3-a: Differential Analysis CD Only CD with Incremental Insttruction Sales revenue 1000000 1120000 120000 Vvariable cost 312500 416000 -103500 Contribution margin 687500 704000 16500 Additional development cost 0 65000 -65000 Differential Profit (loss) 687500 639000 -48500 MSI should: Sell the Cds without instruction manual

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