1. Morning Sky, Inc. (MSI), manufactures and sells computer
games. The company has several product lines based on the age range
of the target market. MSI sells both individual games as well as
packaged sets. All games are in CD format, and some utilize
accessories such as steering wheels, electronic tablets, and hand
controls. To date, MSI has developed and manufactured all the CDs
itself as well as the accessories and packaging for all of its
products.
The gaming market has traditionally been targeted at teenagers
and young adults; however, the increasing affordability of
computers and the incorporation of computer activities into junior
high and elementary school curriculums has led to a significant
increase in sales to younger children. MSI has always included
games for younger children but now wants to expand its business to
capitalize on changes in the industry. The company currently has
excess capacity and is investigating several possible ways to
improve profitability.
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 |
|
|
36,000 |
units |
|
|
36,000 |
units |
|
| Estimated sales price |
|
$ |
30.00 |
|
|
$ |
47.00 |
|
|
| Estimated cost per unit |
|
|
|
|
|
|
|
|
|
| Direct materials |
|
$ |
5.25 |
|
|
$ |
7.75 |
|
|
| Direct labor |
|
|
7.50 |
|
|
|
11.50 |
|
|
| Variable manufacturing overhead |
|
|
7.50 |
|
|
|
10.75 |
|
|
| Fixed manufacturing overhead |
|
|
8.00 |
|
|
|
8.00 |
|
|
| Unit manufacturing cost |
|
$ |
28.25 |
|
|
$ |
38.00 |
|
|
| Additional development cost |
|
|
|
|
|
$ |
105,000 |
|
|
|
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 |
CD with Instructional Materials |
Incremental |
| 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?
|
|
|
|
| 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 18,000
units. Complete the table given below based on Requirement 1 and 2
data.
|
|
|
|
CD Only |
CD with Instructional Materials |
Incremental |
|
Sales Revenue |
|
|
|
|
Variable Costs |
|
|
|
|
Contribution Margin |
|
|
|
|
Additional Development Costs |
|
|
|
|
Differential Profit (Loss) |
|
|
|
|
3-b. Should MSI add the instructional materials
or sell the CDs without them?
|
|
|
|
| Should MSI add the
instructional materials or sell the CDs without them? |
|
|