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 $81,000 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			$44			$48
Unit production costs:
	Direct materials		$8			$11
	Direct labor		3			4
	Variable factory overhead		2			3
	Fixed factory overhead		4			4
	Total unit production costs		$17			$22
Unit variable selling expenses			14			13
Unit fixed selling expenses			8			5
	Total unit costs		$39			$40
Operating income per unit			$5			$8

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 23,000 additional units of moisturizer or 19,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product.

Required:

Question Content Area

1a. Prepare a differential analysis as of August 21. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

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

	Promote Moisturizer (Alternative 1)	Promote Perfume (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank cb0afbfe802a038_1	$fill in the blank cb0afbfe802a038_2	$fill in the blank cb0afbfe802a038_3
Costs:
Direct materials	fill in the blank cb0afbfe802a038_4	fill in the blank cb0afbfe802a038_5	fill in the blank cb0afbfe802a038_6
Direct labor	fill in the blank cb0afbfe802a038_7	fill in the blank cb0afbfe802a038_8	fill in the blank cb0afbfe802a038_9
Variable factory overhead	fill in the blank cb0afbfe802a038_10	fill in the blank cb0afbfe802a038_11	fill in the blank cb0afbfe802a038_12
Variable selling expenses	fill in the blank cb0afbfe802a038_13	fill in the blank cb0afbfe802a038_14	fill in the blank cb0afbfe802a038_15
Sales promotion	fill in the blank cb0afbfe802a038_16	fill in the blank cb0afbfe802a038_17	fill in the blank cb0afbfe802a038_18
Profit (loss)	$fill in the blank cb0afbfe802a038_19	$fill in the blank cb0afbfe802a038_20	$fill in the blank cb0afbfe802a038_21

Question Content Area

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

Promote moisturizerPromote perfume

2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $71,000 ($8 operating income per unit for 19,000 units, less promotion expenses of $81,000). The manager also believed that the selection of moisturizer would reduce operating income by $34,000 ($5 operating income per unit for 23,000 units, less promotion expenses of $81,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be

acceptedopposed

. The sales manager

correctlyerroneously

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

moisturizerperfume

for the promotional campaign, because this alternative will contribute

moreless

to operating income than would be contributed by promoting

moisturizerperfume

.