any 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 Decorated Umbrella Estimated demand 11,000 units 11,000 units Estimated sales price $ 9.00 $ 20.00 Estimated manufacturing cost per unit Direct materials $ 3.50 $ 5.50 Direct labor 1.50 4.00 Variable manufacturing overhead 0.50 2.50 Fixed manufacturing overhead 2.00 2.00 Unit manufacturing cost $ 7.50 $ 14.00 Additional development cost $ 11,000 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 the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 9,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations. 3-b.Suppose the higher price of the decorated umbrella is expected to reduce
The Rosa model of Mohave Corporation 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 | Decorated Umbrella | |||
|---|---|---|---|---|
| Estimated demand | 11,000 | units | 11,000 | units |
| Estimated sales price | $ 9.00 | $ 20.00 | ||
| Estimated |
||||
| Direct materials | $ 3.50 | $ 5.50 | ||
| Direct labor | 1.50 | 4.00 | ||
| Variable manufacturing |
0.50 | 2.50 | ||
| Fixed manufacturing overhead | 2.00 | 2.00 | ||
| Unit manufacturing cost | $ 7.50 | $ 14.00 | ||
| Additional development cost | $ 11,000 |
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 the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 9,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.
3-b.Suppose the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 9,000 units. Should Mohave add decorations
Solution 1:
| Rosa Umbrella | Decorated Umbrella | Incremental | |
| Sales Revenue | $99,000.00 | $2,20,000.00 | $1,21,000.00 |
| Less: variable costs (11000*Total variable costs) | $60,500.00 | $1,32,000.00 | $71,500.00 |
| Contribution margin | $38,500.00 | $88,000.00 | $49,500.00 |
| Additional Development costs | $0.00 | $11,000.00 | $11,000.00 |
| Differential Profit (Loss) | $38,500.00 | $77,000.00 | $38,500.00 |
Solution 2:
Yes, Mohave should add decorations to the Rosa umbrella as Differential Profit is 38,500
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