MSI has been approached by a fourth-grade teacher from Portland about the possib
ID: 2470157 • Letter: M
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 2,500 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $350. A summary of the information related to production of MSI’s current history program follows:
1) Compute the incremental profit (or loss) from accepting the special order.
2) Should MSI accept the offer?
3) Suppose that the special order had been to purchase 2,500 copies of the program for $4.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.
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.
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $1.08 0.45 2.15 1.90 Total cost per unit $5.58 Sales price per unit $12.00Explanation / Answer
1)Incremental profit
Fixed cost is irrelevant for decision making as it is a sunk cost.
Sales revenue = 5 x 2500 = $12,500
Variable cost
Direct material $ 1.08
Direct labor $ 0.45
Variable manufacturing overhead $ 2.15
Total variable cost per unit $3.68
Total variable cost for 2,500 units = 3.68 x 2,500 = $ 9,200
Modifications cost $ 350
Incremental profit $ 2,950
2) MSI should accept the offer as there is incremental profit of $ 2950.
3) Sales revenue = 4.5 x 2,500 = $11,250
(-)Less variable cost = 3.68 x 2500 = $9,200
(-) Less modification = $350
Incremental profit $1,700
The incremental profit from accepting the special order is $ 1,700.
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