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 $$84,000$ 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 $$50$ $$55$

Unit production costs:

Direct materials $$(9)$ $$(12)$

Direct labor $(3)(4)$

Variable factory overhead $(2)(3)$

Fixed factory overhead $(5)(6)$

Total unit production costs $$(19)$ $$(25)$

Unit variable selling expenses $(16)(15)$

Unit fixed selling expenses $(9)(6)$

Total unit costs $$(44)$ $$(46)$

Operating income per unit $$6$ $$9$

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that $20,000$ additional units of tennis shoes or $17,000$ 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 $19$

Line Item Description Promote Tennis Shoes

$($Alternative $1)$ Promote Walking Shoes

$($Alternative $2)$ Differential Effects

$($Alternative $2)$

Revenues $Revenues $Revenues $Revenues

Costs:

Direct materials Direct materials Direct materials Direct materials

Direct labor Direct labor Direct labor Direct labor

Variable factory overhead Variable factory overhead Variable factory overhead Variable factory overhead

Variable selling expenses Variable selling expenses Variable selling expenses Variable selling expenses

Sales promotion Sales promotion Sales promotion Sales promotion

Profit $($loss$)$ $Profit $($loss$)$ $Profit $($loss$)$ $Profit $($loss$)$

Question Content Area

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

$3.$ The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by $$69,000($$$9$ operating income per unit for $17,000$ units, less promotion expenses of $$84,000).$ The manager also believed that the selection of tennis shoes would reduce operating income by$,$ $$36,000($$$6$ operating income per unit for $20,000$ units, less promotion expenses of $$84,000).$ State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be fill in the blank $1$ of $5$

$.$ The sales manager fill in the blank $2$ of $5$

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 fill in the blank $3$ of $5$

for the promotional campaign, because this alternative will contribute fill in the blank $4$ of $5$

to operating income than would be contributed by promoting fill in the blank $5$ of $5$

$.$