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___

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

rowboatontario rowboatontario · Answer 2 · 2025-03-26T12:08:11-04:00

The Incremental profit from accepting the special oder is $1,975. Yes, MSI should accept the special order. Incremental loss would be $1425.

Incremental profit and Loss

To calclulate Incremental loss or profit, Fixed Cost per unit is not relevant as it will be accrued even without any profit or loss. The Formula to calculate Incremental profit/loss is:

(sale price - variable cost ) × units - modification cost

Sales Price = $6

Variable Cost = Direct materials, Direct labor, Variable manufacturing overhead.

Solving this equation will give Incremental profit of $1,975. So the answer of First question is that the profit will be $1975, while the answer of second question is that Yes, MSI should accept the special order.

The Answer of third question is to calculate the incremental profit or loss if copies of the program are $5.50 each. The equaltion will be:

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

It will give an Incremental loss of $ 1,425.00

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