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E7-6 through E7-10.

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[The following information applies to the questions displayed below.] 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.

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			41,000	units			41,000	units
Estimated sales price		$	25.00			$	52.00
Estimated cost per unit
Direct materials		$	1.50			$	1.75
Direct labor			2.00				5.00
Variable manufacturing overhead			2.00				5.25
Fixed manufacturing overhead			2.00				2.00
Unit manufacturing cost		$	7.50			$	14.00
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 21,000 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?

Complete the following table. (Round your "Cost per Unit" answers to 2 decimal places.)

Number of Canoes Produced and Sold	460	620	720
Total costs
Variable Costs	$69,460
Fixed Costs	156,400
Total Costs	$225,860	$0	$0
Cost per Unit
Variable Cost per Unit
Fixed Cost per Unit
Total Cost per Unit	$0.00	$0.00	$0.00

• Required 2

Suppose Sandy Bank sells its canoes for $540 each. Calculate the contribution margin per canoe and the contribution margin ratio. (Round your intermediate calculations and final answers to 2 decimal places. Round your "percentage" answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

Unit Contribution Margin		per Canoe
Contribution Margin Ratio		%

Required 3

Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 units. Complete the table given below based on Requirement 1 and 2 data.

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