Question

The teacher has offered to buy 1,300 copies of the CD at a price of $6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $380. A summary of the information related to production of MSI’s current history program follows: Direct materials $ 1.08 Direct labor 0.42 Variable manufacturing overhead 2.20 Fixed manufacturing overhead 1.90 Total cost per unit $ 5.60 Sales price per unit $ 12.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order. 2. Should MSI accept the special order? Yes No 3. Suppose that the special order had been to purchase 1,300 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. 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.)

Answer 1

Part 1

Incremental profit (or loss) from accepting the special order.=

Sales price	$ 9100
Variable Costs	$ 4810
Contribution	$ 4290
Modification Cost	$ 380
Extra controbution/	$ 3910
Fixed Cost	$ 2470
Incremental profit	$ 1440

Part 2 Since contribution increases by $ 1440, accept the offer

Part 3

Sales price	$7,150.00
Variable Costs	$4,810.00
Contribution	$2,340.00
Modification Cost	$   380.00
Extra controbution	$1,960.00
Fixed Cost	$ 2,470.00
Incremental Profit	$   -510.00

Part 4 At sales price of $ 12 it would be indifferent