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1. 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.

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 Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, Post Office Polka (POP), 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	$ 110,000	$ 105,000	$ 31,000	$ 246,000
Variable costs	47,000	43,000	28,000	118,000
Contribution margin	$ 63,000	$ 62,000	$ 3,000	$ 128,000
Less: Direct Fixed costs	7,200	6,700	2,800	16,700
Segment margin	$ 55,800	$ 55,300	$ 200	$ 111,300
Less: Common fixed costs*	5,500	5,250	1,550	12,300
Net operating income (loss)	$ 50,300	$ 50,050	$ (-1,350)	$ 99,000

*Allocated based on total sales revenue.

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?

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,000 of the common fixed costs could be avoided if the POP product line were eliminated.

3-b. Should MSI drop the POP product?

2.

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

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.

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 22,000 units. Complete the table given below based on this scenario.

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

3.

Cordova manufactures three types of stained glass windows, cleverly named Products A, B, and C. Information about these products follows:

	Product A	Product B	Product C
Sales price	$ 54.00	$ 64.00	$ 114.00
Variable costs per unit	18.80	24.80	26.80
Fixed costs per unit	4.00	4.00	4.00
Required number of labor hours	2.00	2.50	4.00

Cordova currently is limited to 60,000 labor hours per month.

Required:

1-a. Assuming an infinite demand for each of Cordovas products, determine contribution margin per direct labor hour for each product.

1-b. Which product would be Cordova's first choice to produce?

4.

Cordova manufactures three types of stained glass windows, cleverly named Products A, B, and C. Information about these products follows:

	Product A	Product B	Product C
Sales price	$ 40.00	$ 50.00	$ 80.00
Variable costs per unit	21.50	21.00	41.50
Fixed costs per unit	8.00	8.00	8.00
Required number of labor hours	1.25	2.00	2.50

Cordova currently is limited to 41,500 labor hours per month. Cordovas marketing department has determined the following demand for its products:

Product A	14,000	units
Product B	10,000	units
Product C	4,000	units

Required:

Given the companys limited resource and expected demand, compute how many units of each product Cordova should produce to maximize its profit.

Note: Enter the products in the sequence of their preferences; the product with first preference should be entered first. Round your answers to the nearest whole number.