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: Rosa Umbrella Decorated Umbrella
Estimated demand 22,000 units 22,000 units
Estimated sales price $24.00 $34.00
Estimated manufacturing cost per unit
Direct materials $14.50 $16.50
Direct labor 3.50 6.00
Variable manufacturing overhead 2.50 4.50
Fixed manufacturing overhead 5.00 5.00
Unit manufacturing cost $25.50 $32.00
Additional development cost $10,000
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 20,000 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?

Mohave Corp.

1. The increase in profit if Mohave sells the Rosa Umbrella with the additional decorations is:

= $67,000.

2. Mohave should add the decorations to the Rosa Umbrella.  It makes some profits unlike when the Umbrella is without decorations.

3a. The increase in profit if Mohave sells the Rosa Umbrella with the additional decorations is:

= $63,000.

3b. Mohave should still add the decorations to the Rosa Umbrella.  It makes some profits unlike when the Umbrella is without decorations.

Explanation:

a) Data and Calculations:

                                               Rosa Umbrella   Decorated Umbrella

Estimated demand                       22,000 units          22,000 units

Estimated sales price                   $24.00                   $34.00

Estimated manufacturing cost per unit

Direct materials                             $14.50                   $16.50

Direct labor                                       3.50                       6.00

Variable manufacturing overhead  2.50                       4.50

Fixed manufacturing overhead       5.00                      5.00

Unit manufacturing cost             $25.50                  $32.00

Additional development cost                                  $10,000

Total revenue                         $528,000             $748,000

Total manufacturing cost         561,000                704,000

Additional development costs                                 10,000

Operating profit                      ($33,000)              $34,000

Increase in profit = $67,000 = ($33,000) - $34,000

Decreased Demand to 20,000:

Total revenue                         $528,000             $680,000

Total manufacturing cost         561,000                640,000

Additional development costs                                 10,000

Operating profit                      ($33,000)              $30,000

Increase in profit = $63,000 = ($33,000) - $30,000