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 Mohaves two options follows:

Rosa Umbrella Decorated Umbrella Estimated demand 20,000 units 20,000 units Estimated sales price $ 22 $ 32 Estimated manufacturing cost per unit Direct materials $ 12.5 $ 14.5 Direct labor 3.5 6 Variable manufacturing overhead 2.5 4.5 Fixed manufacturing overhead 4 4 Unit manufacturing cost $ 22.5 $ 29 Additional development cost $ 10,000

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 ___________ _______________ _____________

Addtl develop costs ___________ _______________ _____________

Differential profit ___________ _______________ _____________

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 18,000 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 ___________ _______________ _____________

Addtl develop costs ___________ _______________ _____________

Differential profit ___________ _______________ _____________

3-b. Should Mohave add decorations to the Rosa umbrella?

Yes No