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:      

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?

No
Yes

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?

Yes
No

Answer 1

Answer)

Profit/(loss) if they sell rose umbrella:

22000units×($24-$25.5)=($33000)

Answer for 1)

Profit/(loss) if they sell rose umbrella with decorations:

22000units×($34-$32)=$44000

Increase or decrease in profit:

Profit after decorations+profit without decorations

=$44000-($33000)=$77000

Answer for 2)

My answer is yes as they are earning $77000 additionally.

Answer for 3-a)

Profit if they sell with decorations with decreased demand:

20000units×($34-$32)

=$40000(here I don't consider cost for entire 20000units as those umbrellas are not perishable and can be sold afterwards and selling them as ordinary unbrellas with loose $1.5 per umbrella)

Increase or drecease in profit:$40000+$33000=$73000

Answer for 3-b)

My answer is yes as it results in $73000 profits additionally.