Morning Sky, Incorporated (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.

MSIs educational products currently are 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	31,000	units	31,000	units
Estimated sales price	$ 27.00		$ 42.00
Estimated cost per unit
Direct materials	$ 4.75		$ 5.25
Direct labor	6.00		9.00
Variable manufacturing overhead	6.00		9.25
Fixed manufacturing overhead	5.50		5.50
Unit manufacturing cost	$ 22.25		$ 29.00
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.

• Req 1
• Req 2
• Req 3A
• Req 3B

Based on the given data, compute the increase or decrease in profit that would result if instructional materials were added to the CDs.

	CD Only	CD with Instructional Materials	Incremental
Sales Revenue
Variable Costs
Contribution Margin
Additional Development Costs
Differential Profit (Loss)

2. Should MSI add the instructional materials or sell the CDs without them?

Option 1: Add the Instructional Materials. Option 2: Sell the CD's without the instructional materials

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 22,000 units. Complete the table given below based on this scenario.

Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 22,000 units. Complete the table given below based on this scenario.

	CD Only	CD with Instructional Materials	Incremental
Sales Revenue
Variable Costs
Contribution Margin
Additional Development Costs
Differential Profit (Loss)

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

Option 1: Add the Instructional Materials. Option 2: Sell the CD's without the instructional materials