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?

Add the Instructional Materials

OR

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 18,000 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?

Sell the CDs without Instructional Materials

OR

CD Only CD with Instructional Materials Estimated demand 36,000 units 36,000 units Estimated sales price $ 30.00 $ 47.00 Estimated cost per unit Direct materials $ 5.25 $ 7.75 Direct labor 7.50 11.50 Variable manufacturing overhead 7.50 10.75 Fixed manufacturing overhead 8.00 8.00 Unit manufacturing cost $ 28.25 $ 38.00 Additional development cost $ 105,000

Explanation / Answer

Answer

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[36000 x 30]

1080000

[36000 x 47]

1692000

$612000

Variable costs

[36000 x (5.25+7.5+7.5)]

729000

[36000 x (7.75+11.5+10.75)]

1080000

$351000

Contribution margin

351000

612000

$261000

Additional Development costs

None will occur

0

[given]

105000

$105000

Differential Profit (Loss)

351000

507000

$156,000

Option -1 Add the Instructional Materials, as it is Increasing the Net Income by $156,000

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[36000 x 30]

1080000

[18000 x 47]

846000

$-234000

Variable costs

[36000 x (5.25+7.5+7.5)]

729000

[18000 x (7.75+11.5+10.75)]

540000

$-189000

Contribution margin

351000

306000

$-45000

Additional Development costs

None will occur

0

[given]

105000

$105000

Differential Profit (Loss)

351000

201000

$(150000)

Option 1: Sell the CDs without Instructional Materials as it is decreasing Net Income by $150,000

CD Only

CD with Instruction materials

Calculation

Amount ($)

Calculation

Amount ($)

Incremental

Sales Revenue

[36000 x 30]

1080000

[36000 x 47]

1692000

$612000

Variable costs

[36000 x (5.25+7.5+7.5)]

729000

[36000 x (7.75+11.5+10.75)]

1080000

$351000

Contribution margin

351000

612000

$261000

Additional Development costs

None will occur

0

[given]

105000

$105000

Differential Profit (Loss)

351000

507000

$156,000

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