iPad 8:19 AM 13% DO The Rosa model of Mohave Corp is currently manufactured as a

Question

iPad 8:19 AM 13% DO The Rosa model of Mohave Corp is currently manufactured as a very plain umbrella with no decoration. The company is considering changing is 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 Estimated demand Estimated sales price Estimated manufacturing cost per unit Umbrela 36.00 S 18.50 4,000 units 4,000 units 26.00 Direct materials Direct labo Variable manufacturing overhead $ 16.50 3.50 6.00 5.00 5.00 -T2730. Unit manufacturing cost Additional development cost Required: 1. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations Sales Revenue Variable Costs Addisional Development Costs Differential Profit (Loss) 2. Should Mohave add decorations to the Rosa umbrela? 3-a. Suppose that the higher price of the decorated umbrela is expected to reduce estimated demand for this product to 22,000 units Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations Variable Costs Contribution Margin Addisional Development Costs Dfferential Profit (Loss) 3-b. Should Mohave add decorations to the Rosa umbrela References eBook & Resources Learning Objective: 07-02 Define and identify relevant Worksheet

Explanation / Answer

(1).

Rosa Umbrella

(24000 units)

Decorated Umbrella (24000 units)

Incremental

Sales revenue

$624000

$864000

$240000

Variable costs

($540000)

($696000)

($156000)

Contribution margin

$84000

$168000

$84000

Additional development costs

--------

($10000)

($10000)

Differential profit (Loss)

$84000

$158000

$74000

(2). Answer is (Yes).

Explanation;

As we heve seen that decorated umbrella will result into additional profit of $74000 hence Mohave should add decorations to the Rosa umbrella.

(3-a).

Rosa Umbrella

(24000 units)

Decorated Umbrella (22000 units)

Incremental

Sales revenue

$624000

$792000

$240000

Variable costs

($540000)

($638000)

($156000)

Contribution margin

$84000

$154000

$84000

Additional development costs

--------

($10000)

($10000)

Differential profit (Loss)

$84000

$144000

$60000

(3-b). Answer is (Yes).

Explanation;

As we heve seen that decorated umbrella will result into additional profit of $60000 after decrease in demand to 22000 units. Hence Mohave should add decorations to the Rosa umbrella.

Rosa Umbrella

(24000 units)

Decorated Umbrella (24000 units)

Incremental

Sales revenue

$624000

$864000

$240000

Variable costs

($540000)

($696000)

($156000)

Contribution margin

$84000

$168000

$84000

Additional development costs

--------

($10000)

($10000)

Differential profit (Loss)

$84000

$158000

$74000

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