MSI’s educational products are currently sold without any supplemental materials

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 Only CD with Instructional Materials

Estimated demand 43,000 units 43,000 units

Estimated sales price $ 27.00 $ 54.00

Estimated cost per unit

Direct materials $ 2.50 $ 2.75

Direct labor 3.00 6.00

Variable manufacturing overhead 3.00 6.25

Fixed manufacturing overhead 3.00 3.00

Unit manufacturing cost $ 11.50 $ 18.00

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.

2. Should MSI add the instructional materials or sell the CDs without them?

Sell the CDs without Instructional Materials

Add the Instructional Materials

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 20,000 units. Complete the table given below based on Requirement 1 and 2 data.

Explanation / Answer

1) CD Only CD with IM Incremental Estimated units 43000 43000 Estimated price unit 27.00 54.00 Estimated variable cost per unit 8.50 15.00 Total revenue 1161000 2322000 1161000 Total variable cost 365500 645000 279500 Contribution margin 795500 1677000 881500 Additional development cost 0 125000 125000 Profit 795500 1552000 756500 2) Add the Instructional Materials 3-a) CD Only CD with IM Incremental Estimated units 43000 20000 Estimated price unit 27.00 54.00 Estimated variable cost per unit 8.50 15.00 Total revenue 1161000 1080000 -81000 Total variable cost 365500 300000 -65500 Contribution margin 795500 780000 -15500 Additional development cost 0 125000 125000 Profit 795500 655000 -140500 3-b) Sell the CDs without Instructional Materials

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