Required information
E7-6 through E7-10.
[The followinginformation applies to the questions displayed below.]
Morning Sky, Inc. (MSI), manufactures and sells computer games. Thecompany 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 hastraditionally been targeted at teenagers and young adults; however,the increasing affordability of computers and the incorporation ofcomputer activities into junior high and elementary schoolcurriculums has led to a significant increase in sales to youngerchildren. MSI has always included games for younger children butnow wants to expand its business to capitalize on changes in theindustry. The company currently has excess capacity and isinvestigating several possible ways to improve profitability.
E7-6 (Algo) Analyzing Special-Order Decision [LO 7-2, 7-3]
MSI has beenapproached by a fourth-grade teacher from Portland about thepossibility of creating a specially designed game that would becustomized for her classroom and environment. The teacher wouldlike an educational game to correspond to her classroom coverage ofthe history of the Pacific Northwest, and the state of Oregon inparticular. MSI has not sold its products directly to teachers orschool systems in the past, but its Marketing Department identifiedthat possibility during a recent meeting.
The teacher has offered to buy 2,300 copies of the CD at a price of$5.00 each. MSI could easily modify one of its existing educationalprograms about U.S. history to accommodate the request. Themodifications would cost approximately $480. A summary of theinformation related to production of MSI’s current history programfollows:
|
| Directmaterials | $ | 1.19 |
| Directlabor | | 0.35 |
| Variablemanufacturing overhead | | 2.22 |
| Fixedmanufacturing overhead | | 1.80 |
| Total cost perunit | $ | 5.56 |
| Sales price perunit | $ | 13.00 |
|
Required:
1. Compute the incremental profit (or loss) from acceptingthe special order.
2.Should MSI accept the special order?
3.Suppose that the special order had been to purchase 2,300 copies ofthe program for $1.50 each. Compute the incremental profit (orloss) from accepting the special order under this scenario.
4.Suppose that MSI is operating at full capacity. To accept thespecial order, it would have to reduce production of the historyprogram. Compute the special order price at which MSI would beindifferent between accepting or rejecting the special order.
