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 matenials 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 CD Only 44,000 units Materials 44,000 units Estimated demand Estimated sales price Estimated cost per unit $ 28.00 $55.00 Direct materials $ 3.00 $3.25 Direct labor overhead overhead 3.50 3.50 3.50 13.50 6.50 6.75 3.50 20.00 Unit manufacturing cost Additional development cost $125,000 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 Only Instructions Sales Revenue Variable Costs argin Development Costs Differential Profit Loss) 2. Should MSI add the instructional materials or sell the CDs without them? Add the Instructional Materials Sell the CDs without Instructional Materials 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 glven below based on Requirement 1 and 2 data. CD Only Instructions Sales Revenue Variable Costs Contribution Margin Development Costs Differential Profit

Explanation / Answer

Variable Costs: 1 Particulars CD Only CD with IM Increments CD Only CD with IM CD Only CD with IM Sales Revenue 1232000 2420000 1188000 44000*28 44000*55 DM 3.00 3.25 Variable Costs 440000 726000 -286000 44000*10 44000*16.50 DL 3.50 6.50 Contribution Margin 792000 1694000 902000 VMOH 3.50 6.75 Additional Development Cost 0 125000 -125000 Total 10.00 16.50 Differential Profit (Loss) 792000 1569000 777000 2 Since Incremental Earning are coming; Company should sell CD with Instructional Material 3 Particulars CD Only CD with IM Increments CD Only CD with IM Sales Revenue 1232000 1155000 -77000 44000*28 21000*55 Variable Costs 440000 346500 93500 44000*10 21000*16.50 Contribution Margin 792000 808500 16500 Additional Development Cost 0 125000 -125000 Differential Profit (Loss) 792000 683500 -108500 Company should avoid going selling with CD with IM if Units reduced to 21000

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