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

26,000units 26,000units

Estimated sales price $28.00 $38.00

Estimated manufacturing cost per unit

Direct materials $18.50 $20.50

Direct labor 4.50 7.00

Variable manufacturing overhead 3.50 5.50

Fixed manufacturing overhead 6.00 6.00

Unit manufacturing cost $32.50 $39.00

Additional development cost $12,000

Required:

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

Rose Umbrella Decorated Umbrella Incremental

Sales Revenue

Variable Cost

Contributed Margin

Additional Development Cost

Differential Profit (Loss)

3-a.Suppose that the higher price of the decorated umbrella is expected to reduce estimated demand for this product to 24,000 units. Determine the increase or decrease in profit if Mohave sells the Rosa Umbrella with the additional decorations.

Rose Umbrella Decorated Umbrella Incremental

Sales Revenue

Variable Cost

Contributed Margin

Additional Development Cost

Differential Profit (Loss)