Could someone please help me with this question? The Rosa model of Mohave Corp.

Question

Could someone please help me with this 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:

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

3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 15,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.

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

Rosa Umbrella Decorated Umbrella Estimated demand 17,000 units 17,000 units Estimated sales price $ 15.00 $ 26.00 Estimated manufacturing cost per unit Direct materials $ 9.50 $ 11.50 Direct labor 2.50 5.00 Variable manufacturing overhead 1.50 3.50 Fixed manufacturing overhead 3.00 3.00 Unit manufacturing cost $ 16.50 $ 23.00 Additional development cost $
11,000

Explanation / Answer

1)

From above we can cleary say that if he sells umbrella with extra decoration it will earn a profit of $ 40,000

so it is suggestable to him not to continue with normal umbrella which incur loss for him.

3)a)

Even though due to high price , the demand decreases to 15000 units it will earn a profit of $ 28000.

3b) So from the above we can conclude that mohave should add decorations to the rosa umbrella to enjoy profits.

Note: fixed cost amount doesnt change for decrease in demand . even for 1 unit same fixed cost will be incurred.

(Amount in $) Particulars Rose Umbrella Decorated Umbrella Incremental Sales Revenue 255000 442000 187000 Direct material 161500 195500 34000 Direct labour 42500 85000 42500 Variable Costs 25500 59500 34000 Contribution Margin 25500 102000 76500 Fixed costs 51000 51000 0 Additional Development Costs 11000 11000 Differential Profit (loss) -25500 40000

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