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 CD Only 44,000 units Materials 44,000 units Estimated demand Estimated sales price Estimated cost per unit S 28.00 $ 55.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead S 3.00 3.50 3.50 3.50 $ 3.25 6.50 6.75 3.50 Unit manufacturing cost Additional development cost 20.00 $125,000 13.50 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 Incremental Materials 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? O Add the Instructional Materials O 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 given below based on Requirement 1 and 2 data CD with Instructions Incremental CD Only Materials Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

Explanation / Answer

1 CD Only CD with Instructions Materials Incremental Sales revenue 1232000 2420000 1188000 Variable costs 440000 726000 286000 Contribution margin 792000 1694000 902000 Additional development costs 0 125000 125000 Differential profit (loss) 792000 1569000 777000 2 Add the Instructional Materials 3-a. CD Only CD with Instructions Materials Incremental Sales revenue 1232000 1155000 -77000 Variable costs 440000 346500 -93500 Contribution margin 792000 808500 16500 Additional development costs 0 125000 125000 Differential profit (loss) 792000 683500 -108500 Calculations: Variable cost per unit CD Only CD with Instructions Materials Direct materials 3 3.25 Direct labor 3.5 6.5 Variable manufacturing overhead 3.5 6.75 10 16.5

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