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.

Answer 1

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