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:      

Required:
1. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.

  

2. Should Mohave add decorations to the Rosa umbrella?

3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 28,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.



3-b. Should Mohave add decorations to the Rosa umbrella?

Rosa Umbrella Decorated Umbrella Estimated demand 30,000 units 30,000 units Estimated sales price $ 35.00 $ 45.00 Estimated manufacturing cost per unit Direct materials $ 22.50 $ 24.50 Direct labor 5.50 8.00 Variable manufacturing overhead 4.50 6.50 Fixed manufacturing overhead 7.00 7.00 Unit manufacturing cost $ 39.50 $ 46.00 Additional development cost $ 9,000

Explanation / Answer

1 Rosa Umbrella    Decorated Umbrella Increase(decrease) Sales revenue 1050000 1350000 300000 Costs: Direct materials 675000 735000 -60000 Direct labor 165000 240000 -75000 Variable manufacturing overhead 135000 195000 -60000 Fixed manufacturing overhead 210000 210000 0 Additional development cost 9000 -9000 Total costs 1185000 1389000 -204000 Net income -135000 -39000 96000 Net income increases by $96000 2 Yes 3a Rosa Umbrella    Decorated Umbrella Increase(decrease) Sales revenue 1050000 1260000 210000 Costs: Direct materials 675000 686000 -11000 Direct labor 165000 224000 -59000 Variable manufacturing overhead 135000 182000 -47000 Fixed manufacturing overhead 210000 210000 0 Additional development cost 9000 -9000 Total costs 1185000 1311000 -126000 Net income -135000 -51000 84000 Net income increases by $84000 3b Yes

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