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		20,000	units		20,000	units
Estimated sales price	$	22.00		$	32.00
Estimated manufacturing cost per unit
Direct materials	$	12.50		$	14.50
Direct labor		3.50			6.00
Variable manufacturing overhead		2.50			4.50
Fixed manufacturing overhead		4.00			4.00
Unit manufacturing cost	$	22.50		$	29.00
Additional development cost				$	10,000

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

  

	Rosa Umbrella Decorated Umbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

2. Should Mohave add decorations to the Rosa umbrella?

	No
	Yes

3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 18,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.

	Rosa Umbrella Decorated Umbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

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

	No
	Yes

Answer 1

1)

Particulars	Rosa Umbrella (A)	Decorated Umbrella(B)	Incremental(B-A)
Sales revenue	$440,000 (20,000*22)	$640,000(20,000*32)	$200,000
Variable costs	$450,000(20,000*22.5)	$580,000(20,000*29)	$130,000
Contribution margin	($10,000)	$60,000	$70000
Additional development costs	0	$10,000	$10,000
Differential profit/Loss	($10,000)	$50,000	$60,000

2) Mohave Should add decorations to the rosa umbrella since she is getting profit in that option – Yes

3)

Particulars	Rosa Umbrella (A)	Decorated Umbrella(B)	Incremental(B-A)
Sales revenue	$440,000 (20,000*22)	$576,000(18,000*32)	$136,000
Variable costs	$450,000(20,000*22.5)	$522,000 (18,000*29)	$72,000
Contribution margin	($10,000)	$54,000	$64,000
Additional development costs	0	$10,000	$10,000
Differential profit/Loss	($10,000)	$44,000	$54,000

3b) Yes = Mohave still getting profit , so she can add decorations to the rosa umbrella

I hope this will help you.