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 $88,000 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			$53			$58
Unit production costs:
	Direct materials		$(9)			$(12)
	Direct labor		(3)			(4)
	Variable factory overhead		(2)			(3)
	Fixed factory overhead		(6)			(7)
	Total unit production costs		$(20)			$(26)
Unit variable selling expenses			(17)			(16)
Unit fixed selling expenses			(9)			(7)
	Total unit costs		$(46)			$(49)
Operating income per unit			$7			$9

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 18,000 additional units of tennis shoes or 15,000 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
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling expenses
Sales promotion
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 $47,000 ($9 operating income per unit for 15,000 units, less promotion expenses of $88,000). The manager also believed that the selection of tennis shoes would reduce operating income by, $38,000 ($7 operating income per unit for 18,000 units, less promotion expenses of $88,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be accepted/opposed. The sales manager correctly/erroneously 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 shoes/walking shoes for the promotional campaign, because this alternative will contribute more/less to operating income than would be contributed by promoting tennis shoes/walking shoes.

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