EPI has been approached by a fourth-grade teacher from Phoenix 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 desert Southwest and the state of Arizona in particular. EPI 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 1,000 copies of the CD at a price of \($5\) each. EPI could easily modify one of its existing educational programs about U.S. history to accommodate the request.

The modifications would cost approximately \($500\). A summary of the information related to pro¬ duction of EPI’s current history program follows.

Required:

1. Determine the impact this special order would have on EPI’s total profit.

2. Should EPI accept the special order?

3. Suppose that the special order had been to purchase 1,000 copies of the program for \($4.50\) each. What effect would that offer have on EPI’s total profit?

4. Suppose that EPI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Assuming that fixed manufacturing overhead costs are unavoidable, at what price for the special order is EPI financially indifferent between the two options?

5. Explain why a company might accept a special order that did not increase profits. 

Electronic Playground, Inc. (EPI), manufactures and sells computer games. The company has several product lines based on the age range of the target market and the games marketing as educational or entertainment. EPI 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, EPI has developed and manufactured all 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. EPI 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.

Transcribed Image Text:

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit Sales price per unit $ 1.25 0.50 2.25 2.00 $ 6.00 $12.00