EPI 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 EPFs two options follows:

Required:

1. Determine whether EPI should process the educational CDs further or sell them with¬ out instructional materials. Include the difference in net profit from processing the CDs further.

2. Suppose that choosing to process the CDs further will reduce the number of units sold to 35,000. Determine the impact on EPI’s profit of the decision to process further.

Electronic Playground, Inc. (EPI), manufactures and sells computer games. The company has several product lines based on the age range of the target market and the games marketing as educational or entertainment. EPI 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, EPI has developed and manufactured all 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. EPI 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.

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Estimated demand Estimated sales price Estimated cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit manufacturing cost Additional development cost CD Only CD with Instructional Materials 50,000 units 50,000 units $20 $35 $ 1.25 $ 1.75 0.50 4.25 2.25 5.50 2.00 2.00 $ 6.00 $13.50 $65,000