Morning Sky, Inc. (MSI), manufactures and sells computer games.The company has several product lines based on the age range of thetarget market. MSI sells both individual games as well as packagedsets. All games are in CD format, and some utilize accessories suchas steering wheels, electronic tablets, and hand controls. To date,MSI has developed and manufactured all the CDs itself as well asthe accessories and packaging for all of its products.
The gaming market has traditionally been targeted at teenagersand young adults; however, the increasing affordability ofcomputers and the incorporation of computer activities into juniorhigh and elementary school curriculums has led to a significantincrease in sales to younger children. MSI has always includedgames for younger children but now wants to expand its business tocapitalize on changes in the industry. The company currently hasexcess capacity and is investigating several possible ways toimprove profitability.
MSI’s educational products are currently sold without anysupplemental materials. The company is considering the inclusion ofinstructional materials such as an overhead slide presentation,potential test questions, and classroom bulletin board materialsfor teachers. A summary of the expected costs and revenues forMSI’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 ordecrease in profit that would result if instructional materialswere added to the CDs.
| CD only | CD with Instructions Materials | Incremental |
| Sales Revenue | | | |
| Variable Costs | | | |
| Contribution Margin | | | |
| Additional Development Costs | | | |
| Differential Profit (Loss) | | | |
2. Should MSI add the instructional materials orsell the CDs without them?
| Sell the CDs without Instructional Materials |
| Add the Instructional Materials |
3-a. Suppose that the higher price of the CDs withinstructional materials is expected to reduce demand to 20,000units. Complete the table given below based on Requirement 1 and 2data.
| CD only | CD with Instructions Materials | Incremental |
| Sales Revenue | | | |
| Variable Costs | | | |
| Contribution Margin | | | |
| Additional Development Costs | | | |
| Differential Profit (Loss) | | | |
3-b. Should MSI add the instructional materials orsell the CDs without them?
| Sell the CDs without Instructional Materials |
| Add the Instructional Materials |
