The Rosa model of Mohave Corp. is currently manufactured as a very plain umbrell

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:      

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



2. Should Mohave add decorations to the Rosa umbrella?

3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 23,000 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 25,000 units 25,000 units Estimated sales price $ 27.00 $ 37.00 Estimated manufacturing cost per unit Direct materials $ 17.50 $ 19.50 Direct labor 4.50 7.00 Variable manufacturing overhead 3.50 5.50 Fixed manufacturing overhead 5.00 5.00 Unit manufacturing cost $ 30.50 $ 37.00 Additional development cost $ 12,000

Explanation / Answer

1) Statement showing increase or decrease in Profit (units 25,000) (Amts in $)

As the net loss of $87,500 has been decreased to $12,000, it means there is an increase in profit of $75,500 ($87,500 - $12,000). Therefore, the profit will increased by $75,500 if Mohave sells the Rosa Umbrella with the additional decorations.

2) Yes, Mohave should add decorations to the Rosa umbrella because there is an increase in profit by $75,500.

3-a) Profit after adding decorations = Sales - Variable Manuf. Cost - Fixed Cost - Additional Development Cost

= (23,000 units*$37) - (23,000 units*$32) - (25,000 units*$5) - $12,000

= $851,000 - $736,000 - $125,000 - $12,000 = ($22,000)

The loss before addition of decorations was $87,500 and loss after addition of decorations is $22,000. Hence there is an increase in profit of $65,500 ($87,500 - $22,000).

3-b) Yes, Mohave should add decorations to the Rosa umbrella becuase there is an increase in profit of $65,500.

Rose Umbrella Decorated Umbrella Particulars Per unit Amount Per unit Amount Sales (A) 27.00 675,000 37.00 925,000 Less: Manufacturing Cost Direct Materials 17.50 437,500 19.50 487,500 Direct Labor 4.50 112,500 7.00 175,000 Variable Manufacturing Overhead 3.50 87,500 5.50 137,500 Fixed Manufacturing Cost 5.00 125,000 5.00 125,000 Additional Development Cost 0 0 0.48 12,000 Total cost (B) 30.50 762,500 37.48 937,000 Net Profit/(Loss) (A - B) (3.50) (87,500) (0.48) (12,000)

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