Differential Analysis for Sales Promotion Proposal

Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $118,000 has been budgeted for advertising, contests, redeemable coupons, and other promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign:

		Moisturizer			Perfume
Unit selling price			$60			$66
Unit production costs:
	Direct materials		$11			$14
	Direct labor		4			5
	Variable factory overhead		3			4
	Fixed factory overhead		5			7
	Total unit production costs		$23			$30
Unit variable selling expenses			19			18
Unit fixed selling expenses			11			6
	Total unit costs		$53			$54
Operating income per unit			$7			$12

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 24,000 additional units of moisturizer or 20,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product.

Required:

1a. Prepare a differential analysis as of August 21. If an amount is zero, enter "0".

Differential Analysis Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2) August 21

	Promote Moisturizer (Alternative 1)	Promote Perfume (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$fill in the blank da73780b5fc702f_1	$fill in the blank da73780b5fc702f_2	$fill in the blank da73780b5fc702f_3
Costs:
Direct materials	fill in the blank da73780b5fc702f_4	fill in the blank da73780b5fc702f_5	fill in the blank da73780b5fc702f_6
Direct labor	fill in the blank da73780b5fc702f_7	fill in the blank da73780b5fc702f_8	fill in the blank da73780b5fc702f_9
Variable factory overhead	fill in the blank da73780b5fc702f_10	fill in the blank da73780b5fc702f_11	fill in the blank da73780b5fc702f_12
Variable selling expenses	fill in the blank da73780b5fc702f_13	fill in the blank da73780b5fc702f_14	fill in the blank da73780b5fc702f_15
Sales promotion	fill in the blank da73780b5fc702f_16	fill in the blank da73780b5fc702f_17	fill in the blank da73780b5fc702f_18
Income (Loss)	$fill in the blank da73780b5fc702f_19	$fill in the blank da73780b5fc702f_20	$fill in the blank da73780b5fc702f_21

1b. Determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2).

Promote moisturizerPromote perfumePromote moisturizer

2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $122,000 ($12 operating income per unit for 20,000 units, less promotion expenses of $118,000). The manager also believed that the selection of moisturizer would increase operating income by $50,000 ($7 operating income per unit for 24,000 units, less promotion expenses of $118,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be

acceptedopposedaccepted

. The sales manager

correctlyerroneouslycorrectly

considered the full unit costs instead of the differential (additional) revenue and differential (additional) costs. An analysis similar to that presented in part (1) would lead to the selection of

moisturizerperfumemoisturizer

for the promotional campaign, because this alternative will contribute

morelessless

to operating income than would be contributed by promoting

moisturizerperfumemoisturizer

.