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 $146,000 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			$58			$64
Unit production costs:
	Direct materials		$10			$14
	Direct labor		4			5
	Variable factory overhead		2			4
	Fixed factory overhead		6			6
	Total unit production costs		$22			$29
Unit variable selling expenses			18			17
Unit fixed selling expenses			10			7
	Total unit costs		$50			$53
Operating income per unit			$8			$11

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 26,000 additional units of tennis shoes or 22,000 additional units of walking shoes could be sold from the campaign without changing the unit selling price of either product.

Required:

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 subtracted amounts, negative amounts, or 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 Effect on Income (Alternative 2)
Revenues
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling expenses
Sales promotion
Income (Loss)

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 $96,000 ($11 operating income per unit for 22,000 units, less promotion expenses of $146,000). The manager also believed that the selection of tennis shoes would increase operating income only by, $62,000 ($8 operating income per unit for 26,000 units, less promotion expenses of $146,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be . The sales manager 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 for the promotional campaign, because this alternative will contribute to operating income than would be contributed by promoting .