MSrs educaional products are currenty sold without any supplemental matenials. T

Question

MSrs educaional products are currenty sold without any supplemental matenials. The company is considering he inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom buletin board materials for teachers. A summary of the expecied costs and revenues for MSTs two options follows: CD with CD OnlyMaterials 29.000 units 29,000 unis Estmated demand Estimated sales price Estmated cost per unt 25.00 $ 40.00 Direct matenials Direct labor $ 3.75 $ 4.25 8.00 8.25 4.50 Unit manufacuring cost TI3Z ??.co 5.00 5.00 4.50 overhead Adcitional develcpment cost $105,000 Required: 1. Based on the given data, Compute tho increase or decroase in profit that would result f instructional matorials wero added to the CDs CD Only Instructions Vaniablo Costs Contibution Margn t Costs Differential Profit (Loss) 2. Snould MSI add the insructional materia's or sell he CDs without them? Sell the CDs without Instructional Materials Add the Instructional Materials ?Suppose that the hgher price ofthe CDs with instructional materiais is expected to reduce demand to 20000 unts. Comete the table given below based on Requrement 1 and 2 data. CD Only Instructions Sales Revenue Variable Costs Contribution Margin t Costs Diferential Profit 3-b. Shoud MSI add the instructional materas or sell the CDs without them? Add the Instructional Matorials Sell the CDs without Instructional Materials

Explanation / Answer

Answer

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[29000x$25]

725000

[29000x$40]

1160000

435000

Variable costs

[29000 x (3.75+5+5)]

343750

[29000 x (4.25+8+8.25])]

594500

250750

Contribution margin

[725000-343750]

381250

[1160000-594500]

565500

184250

Additional Development costs

None will occur

0

[given]

105000

105000

Differential Profit (Loss)

$381250

$460500

$79250

ADD the instruction Material as it is increasing the net income

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[29000x$25]

725000

[20000x$40]

800000

75000

Variable costs

[29000 x (3.75+5+5)]

343750

[20000 x (4.25+8+8.25])]

410000

66250

Contribution margin

[725000-343750]

381250

[1160000-594500]

390000

8750

Additional Development costs

None will occur

0

[given]

105000

105000

Differential Profit (Loss)

$381250

$285000

$(96250)

SELL OFF THE CD WITHOUT INSTRUCTION material as Increasing the price will lead to lower demand of 20000 units and net income would decrease.

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[29000x$25]

725000

[29000x$40]

1160000

435000

Variable costs

[29000 x (3.75+5+5)]

343750

[29000 x (4.25+8+8.25])]

594500

250750

Contribution margin

[725000-343750]

381250

[1160000-594500]

565500

184250

Additional Development costs

None will occur

0

[given]

105000

105000

Differential Profit (Loss)

$381250

$460500

$79250

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