Answer:
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. Â 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. Â 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
