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’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 Only | CD with Instructional Materials | ||||||||
| Estimated demand | 32,000 | units | 32,000 | units | |||||
| Estimated sales price | $ | 28.00 | $ | 43.00 | |||||
| Estimated cost per unit | |||||||||
| Direct materials | $ | 5.25 | $ | 5.75 | |||||
| Direct labor | 6.50 | 9.50 | |||||||
| Variable manufacturing overhead | 6.50 | 9.75 | |||||||
| Fixed manufacturing overhead | 6.00 | 6.00 | |||||||
| Unit manufacturing cost | $ | 24.25 | $ | 31.00 | |||||
| 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 Requirement 1 and 2 data.
3-b. Should MSI add the instructional materials or sell the CDs without them?
