Question

Required information (The following information applies to the questions displayed below.) Morning Sky, Inc. (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 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 2,200 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 $430. A summary of the information related to production of MSI's current history program follows: $ 1.14 0.43 2.13 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit Sales price per unit 1.90 $ 5.60 $12.00 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 2,200 copies of the program for $2.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. t 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. Complete this question by entering your answers in the tabs below. 1 Required Required Required Required 2 3 Compute the incremental profit (or loss) from accepting the special order. Profit (or Loss) increases by << Required 1 Required 2 > Complete this question by entering your answers in the tabs below. Required Required Required Required Should MSI accept the special order? Should MSI accept the special order? Required 3 > Yes No Complete this question by entering your answers in the tabs below. Required Required Required Required Suppose that the special order had been to purchase 2,200 copies of the program for $2.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. Show less Profit (or Loss) by Required 2 Required 4 > decreases increases no effect Complete this question by entering your answers in the tabs below. Required Required Required Required 1 2 3 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.) Show less Special Order Price < Required 3 Required 4 ) Previous question

Answer 1

The zero-profit and shutdown points are determined by where the sales price intersects with the company's cost curves. At a $500 sales price, the company would incur losses since marginal costs surpass this sales price for most units. Graphs of AC, MC, and AVC would illustrate these financial outcomes.

Step-by-step explanation:

In a scenario where a computer company with fixed costs of $250 produces home computer systems with marginal costs increasing from $700 for the first unit up to $500 for the seventh, determining the zero-profit point and shutdown point requires analyzing both total costs and total revenues at various prices per computer sold.

If computers are sold at $500 each, the calculation for profit or loss involves subtracting total costs from total revenue. For each unit, the difference between the selling price ($500) and the marginal cost will contribute towards covering fixed costs and potentially generating profit. However, since the marginal costs for most units are above $500, selling at this price would result in a loss for each of those units.

Calculating total cost involves summing fixed costs and the marginal costs for all units produced. To obtain a graphical representation, one must plot the Average Cost (AC), Marginal Cost (MC), and Average Variable Cost (AVC) curves. The price at which these costs intersect the sales price will determine the answers to both the zero-profit point and shutdown point questions as well as the profitability at given sales prices.