Differential Analysis for Sales Promotion Proposal

Sole Mates Inc. is planning a one-month campaign for July to promote sales of one of its two shoe products. A total of $196,000 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:

		Tennis Shoes			Walking Shoes
Unit selling price			$77			$85
Unit production costs:
	Direct materials		$(14)			$(18)
	Direct labor		(5)			(6)
	Variable factory overhead		(3)			(5)
	Fixed factory overhead		(7)			(9)
	Total unit production costs		$(29)			$(38)
Unit variable selling expenses			(24)			(23)
Unit fixed selling expenses			(14)			(8)
	Total unit costs		$(67)			$(69)
Operating income per unit			$10			$16

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 28,000 additional units of tennis shoes or 23,000 additional units of walking shoes could be sold without changing the unit selling price of either product.

Required:

Question Content Area

1. Prepare a differential analysis as of June 19 to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate costs. If required, use a minus sign to indicate a loss.

Differential Analysis Promote Tennis Shoes (Alt. 1) or Promote Walking Shoes (Alt. 2) June 19

	Promote Tennis Shoes (Alternative 1)	Promote Walking Shoes (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 24197805c003fc7_1	$fill in the blank 24197805c003fc7_2	$fill in the blank 24197805c003fc7_3
Costs:
Direct materials	fill in the blank 24197805c003fc7_4	fill in the blank 24197805c003fc7_5	fill in the blank 24197805c003fc7_6
Direct labor	fill in the blank 24197805c003fc7_7	fill in the blank 24197805c003fc7_8	fill in the blank 24197805c003fc7_9
Variable factory overhead	fill in the blank 24197805c003fc7_10	fill in the blank 24197805c003fc7_11	fill in the blank 24197805c003fc7_12
Variable selling expenses	fill in the blank 24197805c003fc7_13	fill in the blank 24197805c003fc7_14	fill in the blank 24197805c003fc7_15
Sales promotion	fill in the blank 24197805c003fc7_16	fill in the blank 24197805c003fc7_17	fill in the blank 24197805c003fc7_18
Profit (loss)	$fill in the blank 24197805c003fc7_19	$fill in the blank 24197805c003fc7_20	$fill in the blank 24197805c003fc7_21

Question Content Area

2. Determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).

Promote tennis shoesPromote walking shoes

3. The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by $172,000 ($16 operating income per unit for 23,000 units, less promotion expenses of $196,000). The manager also believed that the selection of tennis shoes would reduce operating income by, $84,000 ($10 operating income per unit for 28,000 units, less promotion expenses of $196,000). 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

tennis shoeswalking shoes

for the promotional campaign, because this alternative will contribute

moreless

to operating income than would be contributed by promoting

tennis shoeswalking shoes

.