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 2,900 copies of the CD at a price of $6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $440. A summary of the information related to production of MSIs current history program follows:

Direct materials	$	1.17
Direct labor		0.33
Variable manufacturing overhead		2.13
Fixed manufacturing overhead		1.90
Total cost per unit	$	5.53
Sales price per unit	$	13.00

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 2,900 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.

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.)

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 24,000 units of the module per year for $27.00 each. The following information pertains to MSIs production of the control modules:

Direct materials	$	13
Direct labor		6
Variable manufacturing overhead		7
Fixed manufacturing overhead		7
Total cost per unit	$	33

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?

	Make
	Buy

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $30,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. 3-b. Does this change your recommendation to MSI?

Yes

No

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	$	115,000		$	110,000		$	32,000			$	257,000
Variable costs		49,000			45,000			28,000				122,000
Contribution margin	$	66,000		$	65,000		$	4,000			$	135,000
Less: Direct Fixed costs		7,400			7,000			3,000				17,400
Segment margin	$	58,600		$	58,000		$	1,000			$	117,600
Less: Common fixed costs*		5,750			5,500			1,600				12,850
Net operating income (loss)	$	52,850		$	52,500		$	(600	)		$	104,750

*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 $1,200 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

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			27,000	units			27,000	units
Estimated sales price		$	23.00			$	38.00
Estimated cost per unit
Direct materials		$	2.75			$	3.25
Direct labor			4.00				7.00
Variable manufacturing overhead			4.00				7.25
Fixed manufacturing overhead			3.50				3.50
Unit manufacturing cost		$	14.25			$	21.00
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.

CD Only CD with Instructions 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?

	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.

CD Only CD with Instructions 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?

	Add the Instructional Materials
	Sell the CDs without Instructional Materials