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		13,000	units		13,000	units
Estimated sales price	$	11.00		$	22.00
Estimated manufacturing cost per unit
Direct materials	$	5.50		$	7.50
Direct labor		1.50			4.00
Variable manufacturing overhead		0.50			2.50
Fixed manufacturing overhead		2.00			2.00
Unit manufacturing cost	$	9.50		$	16.00
Additional development cost				$	13,000

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?

	Yes
	No

3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 11,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.

	Rose 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?

Yes?

No?

Answer 1

1.

particulars	Rosa	Decorated	incremental
(A) sales revenue			143000
(B) variable cost		845	84500
(C) contribution margin(A-B)	45500	104000	58500
(D) additional development cost	0	13000	13000
(E) incremntal profit (D-C)	45500	91000	45500

2.Since the Addition of design yields incermental profit of Rs 45500,hence the design should be added to the umbrella.

3.(A)

Particulars	Rosa	Decorated	Incremental
(A) Sales	143000		99000
(B) Variable Cost	97500		56500
(C) Contribution Margin (A-B)	45500	88000	42500
(D) Additional Development Cost	0	13000	13000
(E) Incremental Profit (C-D)	45500	75000	29500

3.(B) Since the incremntal profit is still positive (Rs.29500),hence the company should add the design to the umbrella