MSI has been approached by a fourth-grade teacher from Portland about the possib
ID: 2555745 • Letter: M
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 directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting. The teacher has offered to buy 2,900 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $420. A summary of the information related to production of MSI's current history program follows: 1.21 0.43 2.22 2.00 5.86 13.00 Direct materials Direct labor Fixed manufacturing overhead Total cost per unit Sales price per unit Required 1. Compute the incremental profit (or loss) from accepting the special order t (or Loss) by 2. Should MSI accept the special order? Yes No 3. Suppose that the special order had been to purchase 2,900 copies of the program for $4.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. t (or Loss) by 4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.) l Order PriceExplanation / Answer
Answer 1
Note : Fixed cost is cot consider for calculating of profit from special project as its a sunk cost & hence it is irreverent
Computation of incremental profit (or loss ) from acepting special order
Answer 2 . Yes
Explanation : Since the special order will result in increase in profit by $ 2,886 , thus MSI should accept the special order.
Answer 3
Computation of incremental profit (or loss ) from acepting special order
Profit increase by $1,436
Answer 4
Note : Since MSI is operating at full capacity , thus to be indifferent between accepting or rejecting special order , special order price must be equal to the variable cost for special order plus contribution lost on regular operations plus the modification costs.
Total variable cost for special order = ($1.21 + $0.43 + $2.22) * 2,900 units = $11,194
Total Contribution lost by accepting special order = (History programe 's selling p.u - varaible p.u ) * Special order units
=[ $13 - ($1.21 + $0.43 + $2.22) ] * 2,900 units = $26,506
Modification cost = $420
Special order price = (Total Variable cost + Total Contribution lost + Modification cost ) / Special order units
= ($11,194 +$26,506 + $420) / 2,900 units = $13.14 per unit
Particular Amount ($) Incremental sales revenue (2,900 * $5) 14,500 Less :Incremental variable costs [($1.21 + $0.43 + $2.22) * 2,900] (11,194) Incremental Contribution 3,306 Less : Modification costs (420) Incremental profit $2,886Related Questions
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