Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI 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, MSI has developed and manufactured all the 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. MSI 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.

2.value: 18.00 pointsRequired information MSI has been approached by a fourth-grade teacher from Portland about the possibility of creating a specially designed game that would be customized for her classroom and environment. The teacher would like an educational game to correspond to her classroom coverage of the history of the Pacific Northwest, and the state of Oregon in particular. MSI has not sold its products directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting.

The teacher has offered to buy 1,000 copies of the CD at a price of $7.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $470. A summary of the information related to production of MSIs current history program follows:

Direct materials $ 1.10 Direct labor 0.35 Variable manufacturing overhead 2.22 Fixed manufacturing overhead 1.90 Total cost per unit $ 5.57 Sales price per unit $ 12.00

Required: 1. Compute the incremental profit (or loss) from accepting the special order.

2. Should MSI accept the special order?

Yes No

3. Suppose that the special order had been to purchase 1,000 copies of the program for $6.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.

4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.)

HintsReferenceseBook & Resources Hint #1 Check my work

3.value: 18.00 pointsRequired information MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co. (MLC) to produce 13,000 units of the module per year for $26.00 each. The following information pertains to MSIs production of the control modules:

Direct materials $ 14 Direct labor 6 Variable manufacturing overhead 5 Fixed manufacturing overhead 5 Total cost per unit $ 30 MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production.

Required: 1. Compute the difference in cost between making and buying the control module.

2. Should MSI buy the modules from MLC or continue to make them?

Buy Make

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $37,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

3-b. Does this change your recommendation to MSI?

No Yes HintsReferenceseBook & Resources Hint #1 Check my work

4.value: 18.00 pointsRequired information MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of age and includes tours of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production.

MSIs information related to the ToddleTown Tours collection follows:

Segmented Income Statement for MSIs ToddleTown Tours Product Lines Pet Store Parade Grocery Getaway Post Office Polka Total Sales revenue $ 80,000 $ 75,000 $ 25,000 $ 180,000 Variable costs 35,000 31,000 20,000 86,000 Contribution margin $ 45,000 $ 44,000 $ 5,000 $ 94,000 Less: Direct Fixed costs 6,000 4,900 4,700 15,600 Segment margin $ 39,000 $ 39,100 $ 300 $ 78,400 Less: Common fixed costs* 12,000 11,250 3,750 27,000 Net operating income (loss) $ 27,000 $ 27,850 $ (3,450 ) $ 51,400 *Allocated based on total sales dollars.

MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.

Required: 1. Calculate the incremental effect on profit if the POP product is eliminated.

2. Should MSI drop the POP product?

Yes No

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $3,000 of the common fixed costs could be avoided if the POP product line were eliminated.

3-b. Should MSI drop the POP product?

Yes No HintsReferenceseBook & Resources Hint #1 Check my work

5.value: 18.00 pointsRequired information 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 38,000 units 38,000 units Estimated sales price $ 33.00 $ 49.00 Estimated cost per unit Direct materials $ 6.25 $ 8.75 Direct labor 8.50 12.50 Variable manufacturing overhead 8.50 11.75 Fixed manufacturing overhead 9.00 9.00 Unit manufacturing cost $ 32.25 $ 42.00 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?

Add the Instructional Materials Sell the CDs without 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.

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

Sell the CDs without Instructional Materials Add the Instructional Materials