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			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.( Sales revenue, variable costs, contribution margin, additional development costs and differential profit for rose umbrella, decorated umbrella and incremental)

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 9,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.( Sales revenue, variable costs, contribution margin, additional development costs and differential profit for rose umbrella, decorated umbrella and incremental)

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

Answer 1

Answer:-1)-

Mohave Corp.
Particulars	Rose Umbrella	Decorated Umbrella	Incremental
	(a)	(b)	(c=a-b)
Sales revenue	11000 units*$9 per unit=99000	11000 units*$20 per unit=220000	121000
Less:- Variable costs	11000 units*$5.5 per unit=60500	11000 units*$12 per unit=132000	71500
Contribution margin	38500	88000	49500
Additional Developments costs	Nil	11000	11000
Differential profit (loss)	38500	77000	38500

2)- Mohave should add decorations to the Rosa umbrella due to incremental profit of $38500.

3-a)-

Mohave Corp.
Particulars	Rose Umbrella	Decorated Umbrella	Incremental
	(a)	(b)	(c=a-b)
Sales revenue	11000 units*$9 per unit=99000	9000 units*$20 per unit=180000	81000
Less:- Variable costs	11000 units*$5.5 per unit=60500	9000 units*$12 per unit=108000	47500
Contribution margin	38500	72000	33500
Additional Developments costs	Nil	11000	11000
Differential profit (loss)	38500	61000	22500

3-b)- Mohave should add decorations to the Rosa umbrella due to incremental profit of $22500.