80.2K

Verified Solution

Link Copied!

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 Mohaves two options follows:

	Rosa Umbrella			Decorated Umbrella
Estimated demand		18,000	units		18,000	units
Estimated sales price	$	16.00		$	27.00
Estimated manufacturing cost per unit
Direct materials	$	10.50		$	12.50
Direct labor		2.50			5.00
Variable manufacturing overhead		1.50			3.50
Fixed manufacturing overhead		4.00			4.00
Unit manufacturing cost	$	18.50		$	25.00
Additional development cost				$	12,000

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

	Rosa Umbrella Decorated Umbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

2. Should Mohave add decorations to the Rosa umbrella?

	No
	Yes 3-a. Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 16,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations. Rosa Umbrella Decorated Umbrella Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

Answer & Explanation Solved by verified expert

See Answer