Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $140,000 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:

	Moisturizer	Perfume
Unit selling price	$55	$60
Unit production costs:
Direct materials	$ 9	$14
Direct labor	3	5
Variable factory overhead	3	5
Fixed factory overhead	6	4
Total unit production costs	$21	$28
Unit variable selling expenses	16	15
Unit fixed selling expenses	12	6
Total unit costs	$49	$49
Operating income per unit	$ 6	$11

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of moisturizer or 20,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product.

Required:

1.

Prepare a differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

2.

Determine whether to promote moisturizer (Alternative 1) or promote perfume (Alternative 2).

3.

The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $80,000 ($11 operating income per unit for 20,000 units, less promotion expenses of $140,000). The manager also believed that the selection of moisturizer would reduce operating income by $8,000 ($6 operating income per unit for 22,000 units, less promotion expenses of $140,000). State briefly your reasons for supporting or opposing the tentative decision.

Labels

Cash flows from investing activities

Cash flows from operating activities

Costs

Amount Descriptions

Cash payments for merchandise

Cash received from customers

Direct labor

Direct materials

Gain on sale of investments

Income (loss)

Loss on sale of investments

Revenues

Sales promotion

Variable factory overhead

Variable selling expenses

1. Prepare a differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)

August 21

1		Promote Moisturizer	Promote Perfume	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8
9
10

2. Determine whether to promote moisturizer (Alternative 1) or promote perfume (Alternative 2).

The company is indifferent since the result is the same regardless of which alternative is chosen.

Promote moisturizer.

Promote perfume.

3. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $80,000 ($11 operating income per unit for 20,000 units, less promotion expenses of $140,000). The manager also believed that the selection of moisturizer would reduce operating income by $8,000 ($6 operating income per unit for 22,000 units, less promotion expenses of $140,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales managers tentative decision should be opposed . The sales manager 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 moisturizer for the promotional campaign because this alternative will contribute more to operating income than would be contributed by promoting perfume .