The Rosa model of Mohave Corp. is currently manufactured as a very plain umbrell

Question

The Rosa model of Mohave Corp. is currently manufactured as a very plain umbrella with no decoration. The company is considering changing this product to a much more decorative model by adding a silk-screened design and embellishments. A summary of the expected costs and revenues for Mohave's two options follows Rosa Umbrella Estimated demand Estimated sales price Estimated manufacturing cost per unit 29,000 units 29,000 units S 31.00 S 41.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead S 21.50 4.50 3.50 6.00 35.50 S 23.50 7.00 5.50 6.00 Unit manufacturing cost Additional development cost S12,000 Required 1. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations. Rosa Decorated Umbrella Umbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 2. Should Mohave add decorations to the Rosa umbrella? No O Yes 3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 27,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations. Rosa Decorated UmbrellaUmbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 3-b. Should Mohave add decorations to the Rosa umbrella? O No O Yes

Explanation / Answer

1. Increse in profit if Mohave sells the Rosa umbrella with the additional decorations.

$8,99,000

(29000*$31)

$11,89,000

(29000*$41)

$8,55,500

(29000*$29.5)

$10,44,000

(29000*$36)

2.Mohave must add decorations to Rosa Umbrella as incremental profit is $89,500.

3. In a circumstances where higher price of decorated umbrella expected to reduce demand for this product to 27,000 units. Incremental is as follows.

$8,99,000

(29000*$31)

$11,07,000

(27000*$41)

$8,55,500

(29000*$29.5)

$9,72,000

(27000*$36)

4. Mohave should add decoartions to umbrella as incremental profit is $79,500.

PARTICULARS ROSA UMBRELLA DECOARATED UMBRELLA INCREMENTAL Sales Revenue

$8,99,000

(29000*$31)

$11,89,000

(29000*$41)

$2,90,000 Variable Cost

$8,55,500

(29000*$29.5)

$10,44,000

(29000*$36)

$1,88,500 Contribution $43,500 $1,45,000 $1,01,500 Additional Development Cost - $12,000 $12,000 Differemtial Profit $43,500 $1,33,000 $89,500

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