E7-8 Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6] MSI’s educational

Question

E7-8 Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6]

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?

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 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?

CD Only CD with Instructional Materials Estimated demand 41,000 units 41,000 units Estimated sales price $ 25.00 $ 52.00 Estimated cost per unit Direct materials $ 1.50 $ 1.75 Direct labor 2.00 5.00 Variable manufacturing overhead 2.00 5.25 Fixed manufacturing overhead 2.00 2.00 Unit manufacturing cost $ 7.50 $ 14.00 Additional development cost $ 105,000

Explanation / Answer

Calculation of Variable Cost per unit :-

1) All Amount in $.

2) Add the Instruction Materials becouse Additional Contribution Margin is $735500.

3)

a) All Amount in $.

b) Sell the CDs without instruction materials becouse Contribution margin reduce by $64500.

Particulars CD Only CD with instruction material Direct Material 1.50 1.75 Direct Labour 2.00 5.00 Variable Overhead 2.00 5.25 Total Variable Cost Per Unit ($) 5.50 12.00

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