The Rosa model of Mohave Corp. is currently manufactured as a very plain umbrell
ID: 2436302 • Letter: T
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:
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 embe shments. A summary of the expected costs and revenues for Mohave's two options follows Rosa Decorated Umbrella Umbralla Estimated demand Estimated sales price Estimated manufacturing cost per unit 1000 units 11,000 units $ 9.00 20.00 Diract materials Direct labor Vaniable manufactuing overhead Fixed manufacturing overhead 5 3.50 1.50 0.50 2.00 .50 $ 5.50 4.00 2.50 2.00 14. 00 $ 11,000 Unit manufacturing cost Additional development cost Required: 1. Detemine the increase or decrease in profit if Mohave sells the Rosa Umbrel a with the additional decorations. brell Sales Revenue Vanable Costs Contribution Margin Additional Development Costs Differential Profit Loss)Explanation / Answer
1) Rose umbrella decorated umbrella incremental Sales revenue(a) 11000*9 11000*20 99,000.00 220,000.00 121,000.00 Less:Variable cost(b) Direct material 3.5*11000 5.5*11000 38,500.00 60,500.00 22,000.00 Direct labour 1.5*11000 4*11000 16,500.00 44,000.00 27,500.00 variable manufacturing overhead .5*11000 2.5*11000 5,500.00 27,500.00 22,000.00 Contribution( c)=a-b 38,500.00 88,000.00 49,500.00 Less:additional development cost - 11,000.00 11,000.00 - Differential Profit/(Loss) 38,500.00 77,000.00 38,500.00 2)Yes,Mohave should add decorations to the rose umbrella as it gives more differential profit than the other 3)a) Rose umbrella decorated umbrella incremental Sales revenue(a) 11000*9 9000*20 99,000.00 180,000.00 81,000.00 Less:Variable cost(b) Direct material 3.5*11000 5.5*9000 38,500.00 49,500.00 11,000.00 Direct labour 1.5*11000 4*9000 16,500.00 36,000.00 19,500.00 variable manufacturing overhead .5*11000 2.5*9000 5,500.00 22,500.00 17,000.00 Contribution( c)=a-b 38,500.00 72,000.00 33,500.00 Less:additional development cost - 11,000.00 11,000.00 - Differential Profit/(Loss) 38,500.00 61,000.00 22,500.00 3)b)Yes,Mohave should add decorations to the rose umbrella as it gives more differential profit than the other Since units sold has decreased the differential profit also decreased but still differential profit of decorated umbrella is more than the rose umbrella.
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