Differential Analysisfor 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 $100,000 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.

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 7,000 additional units of tennis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of either product.

Required:

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1. Prepare a differential analysis as of June 19, 2014, to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2). If an amount is zero, enter zero "0".

Differential Analysis
Promote Tennis Shoe (Alt. 1) or Promote Walking Shoe (Alt. 2)
June 19, 2014
Promote Tennis Shoe (Alternative 1)	Promote Walking Shoe (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling expenses
Sales promotion
Income (Loss)	$	$	$

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1. Subtract the variable costs, including the promotion costs, from the revenues for each product, based on the proposed production. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

2. Determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2). SelectPromote tennis shoesPromote walking shoesCorrect 1 of Item 2

3. The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by $5,000 ($15 operating income per unit for 7,000 units, less promotion expenses of $100,000). The manager also believed that the selection of tennis shoes would reduce operating income by $37,000 ($9 operating income per unit for 7,000 units, less promotion expenses of $100,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should beSelectacceptedopposedCorrect 2 of Item 2. The sales managerSelectcorrectlyerroneouslyCorrect 3 of Item 2considered 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 ofSelectwalking shoestennis shoesCorrect 4 of Item 2for the promotional campaign, since this alternative will contributeSelectmorelessCorrect 5 of Item 2to operating income than would be contributed by promotingSelectwalking shoestennis shoesCorrect 6 of Item 2.