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 MSI's current history program follows:

Direct materials$1.10Direct labor0.35Variable manufacturing overhead2.22Fixed manufacturing overhead1.90Total cost per unit$5.57Sales 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?

YesNo

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.)

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3.

value:

18.00 points

Required 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 MSI's production of the control modules:

Direct materials$14Direct labor6Variable manufacturing overhead5Fixed manufacturing overhead5Total 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?

BuyMake

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?

NoYesHints

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4.

value:

18.00 points

Required 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.

MSI's information related to the ToddleTown Tours collection follows:

Segmented Income Statement for MSI'sToddleTown Tours Product LinesPet Store ParadeGrocery GetawayPost Office PolkaTotalSales revenue$80,000$75,000$25,000$180,000Variable costs35,00031,00020,00086,000Contribution margin$45,000$44,000$5,000$94,000Less: Direct Fixed costs6,0004,9004,70015,600Segment margin$39,000$39,100$300$78,400Less: Common fixed costs*12,00011,2503,75027,000Net 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?

YesNo

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?

YesNoHints

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5.

value:

18.00 points

Required information

MSI's 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 MSI's two options follows:

CD OnlyCD with Instructional MaterialsEstimated demand38,000units38,000unitsEstimated sales price$33.00$49.00Estimated cost per unitDirect materials$6.25$8.75Direct labor8.5012.50Variable manufacturing overhead8.5011.75Fixed manufacturing overhead9.009.00Unit manufacturing cost$32.25$42.00Additional 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 MaterialsSell 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 MaterialsAdd the Instructional Materials