Part 1 MSI has been approached by a fourth-grade teacher from Portland about the
ID: 2551833 • Letter: P
Question
Part 1
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 1,700 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 $410. A summary of the information related to production of MSI’s current history program follows:
Required:
1. Compute the incremental profit (or loss) from accepting the special order.
2. Should MSI accept the special order?
3. Suppose that the special order had been to purchase 1,700 copies of the program for $5.50 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.)
Part 2.
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:
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 18,000 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?
Explanation / Answer
1. Revenue from the order = 1700*6 =$10,200
Less: Varaible cost (1.05+.46+2.10)*1700 = $6137
Less: Modification cost = $410
Incremental Profit = $3653
Note: Fixd costs have not been considered as they are sunk cost
2.Yes, the order should be accepted since there is an incremental profit of $3653.
3.
Revenue from the order = 1700*5.5 =$9350
Less: Varaible cost (1.05+.46+2.10)*1700 = $6137
Less: Modification cost = $410
Incremental Profit = $2803
4. Since, it is operating at full capacity, MSI would be indifferent between accepting the order or rejecting it at the levvel at which it is earning the level of profits from external sales. Since, for the special order it has to incur modification expenses of $410, the price would be 13+.24 =$13.24