The Rosa model of Mohave Corp.is currenty manufactured as a very plain umbrella
ID: 2564561 • Letter: T
Question
The Rosa model of Mohave Corp.is currenty manufactured as a very plain umbrella with no decoration. The company ls 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 Decorated Umbreila Estimated demand Estimated sales price Estmated manufacturing cost per unit 26,000 units 26,000 units 28.00 $38.00 Direct materials Direct labor Variable manufacturing overhead $ 18.50 4.50 3.50 $ 20.50 7.00 5.50 6.00 Fixed manufacturing overhead Unit manufacturing cost Addiional development cost $12,000 Required: 1. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations. Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 2. Should Mohave add decorations to the Rosa umbrella? No YesExplanation / Answer
Answer 3-a
Rosa umbrella
Decorated Umbrella
Incremental
Sales Revenue
728000
988000
260000
Variable cost
-689000
-858000
-169000
Contribution Margin
39000
130000
91000
Additional Development cost
-12000
-12000
Differential profit (loss)
39000
118000
79000
Rosa umbrella
Variable cost=direct materials + direct labor+ variable manufacturing overhead
Variable cost= $18.50+$4.50+$3.50
= $26.50
Decorated umbrella
Variable cost=direct materials + direct labor+ variable manufacturing overhead
= $20.50+$7+$5.50
= $33
Answer 3-b
Yes Mohave should add decorations to the Rosa umbrella as it will increase profits.
Answer 2
2
Computation of contribution margin per labor hour and machine hour:
Table A
Table B
Table C
Selling price
$ 52
$ 56
$ 70
Total variable cost
-16
-19
-24
Contribution margin per unit
26
37
46
Labor hours required per unit
0.50
0.50
1.00
Contribution margin per labor hour
52
74
46
Machine hours required per unit
4
2.50
2
Contribution margin per machine hour
6.5
14.80
23
Ranking
2
1
3
2. &3
If Blossom Company has only 50000 labor hours, the products should be emphasized in the order, Table B, Table A and Table C (Contribution margin per labor hour)
Particulars
A
B
C
Total
Expected demand
50000
25000
25000
100000
Ranking
2
1
3
Direct labor per unit
.50
.50
1
Allocation of 50000 direct labor hrs.
25000
12500
12500
50000
No. of units
4. If Blossom has only 244,000 machine hours available, the order of product emphasis should be Table C, Table B and Table A, i.e. in order of contribution margin per machine hour.
Particulars
A
B
C
Expected demand
26
37
46
Machine hrs. per unit
4
2.50
2
Contribution per machine hrs
6.5
14.80
23
Ranking
3
2
1
Particulars
A
B
C
Total
Expected demand
50000
25000
25000
100000
Ranking
3
2
1
Machine Hrs. per unit
4
2.50
2
Allocation of 50000 direct labor hrs.
131500
62500
50000
No. of units
Rosa umbrella
Decorated Umbrella
Incremental
Sales Revenue
728000
988000
260000
Variable cost
-689000
-858000
-169000
Contribution Margin
39000
130000
91000
Additional Development cost
-12000
-12000
Differential profit (loss)
39000
118000
79000
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