E7-9 (Algo) Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6]

MSIs 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 MSIs two options follows:

	CD Only				CD with Instructional Materials
Estimated demand			26,000	units			26,000	units
Estimated sales price		$	22.00			$	37.00
Estimated cost per unit
Direct materials		$	2.25			$	2.75
Direct labor			3.50				6.50
Variable manufacturing overhead			3.50				6.75
Fixed manufacturing overhead			3.00				3.00
Unit manufacturing cost		$	12.25			$	19.00
Additional development cost						$	105,000

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?

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 19,000 units. Complete the table given below based on Requirement 1 and 2 data.

3-b. Should MSI add the instructional materials or sell the CDs without them?

Based on the given data, compute the increase or decrease in profit that would result if instructional materials were added to the CDs. $ CD with CD Only Instructional Incremental Materials Sales Revenue 572,000 $ 962,000 $ 390,000 Variable Costs 318,500 494,000 175,500 Contribution Margin $ 235,500 $ 468,000 $ 214,500 Additional Development Costs 0 105,000 105,000 Differential Profit (Loss) $ 253,500 X $ 363,000 $ 109,500 Should MSI add the instructional materials or sell the CDs without them? Should MSI add the instructional materials or sell the CDs without them? Add the Instructional Materials uppose that the higher price of the CDs with instructional materials is expected to reduce demand to 19,000 units. Complete he table given below based on Requirement 1 and 2 data. ales Revenue $ ariable Costs CD with CD Only Instructional Incremental Materials 572,000 $ 703,000 $ 131,000 318,500 X 361,000 42,500 253,500 $ 342,000 $ 88,500 105,000 105,000 253,500 $ 237,000 $ (16,500) $ ontribution Margin Iditional Development Costs fferential Profit (Loss) Should MSI add the instructional materials or sell the CDs without them? Add the Instructional Materials