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 direc teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting The teacher has offered to buy 1,600 copies of the CD at a price of $6.00 each. MSI could easily modity one of its existing educational programs about U.S history to accommodate the request modifications would cost approximately $360. 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 S 1.05 0.31 2 16 1 80 $ 532 13.00 Total cost per unit Sales price per unit Required 1. Compute the incremental proft (or loss) from accepting the special order 5 3,968 ofit (or Loss) Increases by 2. Should MSI accept the special order? Yes No Compute the incremental prott (or loss) from accepting the special order under this scenanc had heen to ourchase 1.600 copies of the program for $5 50 each

Explanation / Answer

(1). Profit or (loss) increases by $3608

Explanation;

Note: Fixed costs will not be considered for this because these fixed costs will not change due to this decision making.

Incremental profit or (loss) will be calculated as follow;

Sales revenue (1600 * $6)

$9600

Less: Variable costs;

Direct materials (1600 * $1.05)

($1680)

Direct labor (1600 * $0.31)

($496)

Variable manufacturing overheads (1600 * $2.16)

($3456)

Modifications cost

($360)

Incremental profit

$3608

(2). Yes, MSI should accept special order because it will increase the overall profits by $3608 due to incremental profits.

(3). Profit or (loss) increases by $2808

Explanation;

Note: Fixed costs will not be considered for this because these fixed costs will not change due to this decision making.

Incremental profit or (loss) will be calculated as follow;

Sales revenue (1600 * $5.50)

$8800

Less: Variable costs;

Direct materials (1600 * $1.05)

($1680)

Direct labor (1600 * $0.31)

($496)

Variable manufacturing overheads (1600 * $2.16)

($3456)

Modifications cost

($360)

Incremental profit

$2808

(4). Special order price $13.22 (Approx.)

Explanation;

If MSI is operating at ful capacity then it means that there is no capacity to fulfill special order hence sale of history program will be reduced to fulfill special order and it is given that history program being sold at $13 and special order required modication cost of $360 thus special order should be price as follow;

$13 + ($360 / 1600) = $13.225 or $13.22 (Approx.)

At this price MSI will be indifferent between accepting and rejecting the special order.

Sales revenue (1600 * $6)

$9600

Less: Variable costs;

Direct materials (1600 * $1.05)

($1680)

Direct labor (1600 * $0.31)

($496)

Variable manufacturing overheads (1600 * $2.16)

($3456)

Modifications cost

($360)

Incremental profit

$3608

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