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 Materials CD Only 40,000 units Estimated demand Estimated sales price Estimated cost per unit 40,000 units 34.00 $ 51.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $ 2.00 9.50 9.50 10.00 S 31.00 $2.75 13.50 12.75 10.00 S 39.00 $105,000 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 with Instructions Materials CD Only Incremental s 1,360,00o S 2,040,000 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? Sell the CDs without Instructional Materials Add the Instructional Materials

Explanation / Answer

Req 1: Incremental Income analysis: CD ONLY CD WITH INCREMENTAL MANUAL Sales revenue 1360000 2040000 680000 Variable cost 840000 1160000 -320000 Contribution margin 520000 880000 360000 Additional development cost 0 105000 -105000 Differential inccome/(loss) 520000 775000 255000 Req2: MSI shall INSTRUCTION MANUAL WITH CDs Req 3: Incremental Income analysis: CD ONLY CD WITH INCREMENTAL MANUAL Sales revenue 1360000 1122000 -238000 Variable cost 840000 638000 202000 Contribution margin 520000 484000 -36000 Additional development cost 0 105000 -105000 Differential inccome/(loss) 520000 379000 -141000 Req 4: MSI should SELL CDs WITHOUT INSTRUCTION MANUAL

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