Differential Costs of Alternative Marketing Strategies: Calco Corporation has been a major producer and distributor of plastic products for industrial use. The product engineering department has recently presented a proposal to produce a new product designed for the consumer market. The product was very well suited for the company's manufacturing process. No modification of machinery or molds would be required nor would operations in the assembly department have to be changed in any way. In addition, there was an adequate amount of manufacturing capacity available.

Management is considering two alternatives for marketing the product. The first is to add this responsibility to Calco's current marketing department. The other alter- native is to acquire a small, new company named Jasco, Inc. Jasco was started by some former employees of a firm that specialized in marketing plastic products for the consumer market when they lost their jobs as a result of a merger. The only requirements of the Jasco people are that Calco hire the Jasco employees and take over a lease for office space.

The product would be manufactured by Calco, and the manufacturing costs would be the same for either marketing alternative. The product engineering department has prepared the following estimates of the unit manufacturing costs for the new product:

Twenty-five percent of the total overhead rate is for variable costs like supplies, employee benefits, power, and so forth; and 75 percent for fixed costs like supervision, depreciation, insurance, and taxes. Calco's marketing department has developed a proposal for the distribution of the new consumer product. The marketing department's forecast of the annual financial results for its proposal to market the new product is as follows:

The Jasco people also prepared a forecast of the annual financial results. The forecast presented below was based on the assumption that Jasco would become part of Calco and be responsible for marketing the new product in the consumer market.

Calco's management believes profits will be $35,000 higher ($225,000 $190,000) if the marketing is done by Calco's marketing department, but they have turned to you for help.

Required: Prepare a schedule of differential costs and revenues to assist management in deciding whether to enter the consumer market.

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Direct materials Direct labor Manufacturing overhead Total $14.00 3.50 10.00 $27.50