Question

1.11 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 1,100 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 $390. A summary of the information related to production of MSI's current history program follows:

Direct materials $1.20
Direct labor 0.44
Variable manufacturing overhead 2.21
Fixed manufacturing overhead 1.90
Total cost per unit $5.75
Sales price per unit $13.00

Required 1. Compute the incremental profit (or loss) from accepting the special order

Profit (or Loss) _____by_____

2. Should MSI accept the special order?
Yes
No

3. Suppose that the special order had been to purchase 1,100 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario
Profit (or Loss) _____by_____

Answer 1

Answer:

1) $ 1,975.00

2. Yes,

3.  $$ 1,425.00

Explanation:

To compute the incremental profit (or loss) from accepting the order would be determined by considering the relevant cash flow.

Kindly note that the relevant cash flows are those that arise as direst consequence of accepting the order.

The sale and other variable cost are relevant except the fixed cost per unit.The fixed cost of $1.90 per unit is not relevant because whether or not the order is accepted the fixed cost would still be incurred either.

1) Incremental profit/(loss)

= (sales - variable cost ) × units  - modification cost

= (6-(1.20+0.44+2.21)× 1,100) - 390

= $ 1,975.0

2. No, MSI should accept the special  order because it would lead to a profit $ 1,975.00

3.Special order of 1,100 units at $5.50 per unit

Incremental loss = (5.50 -(1.20+0.44+2.21) × 1,100 ) - 390

                      = $ 1,425.00