Wedge Shoe Company is planning a one-month campaign for August to promote sales of one of its two shoe products. A total of $650,000 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 20,000 additional units of closed-toe shoes or 18,000 additional units of open-toe shoes could be sold without changing the unit selling price of either product.

Instructions

1. Prepare a differential analysis report presenting the additional revenue and additional costs anticipated from the promotion of closed-toe shoes and open-toe shoes.

2. The sales manager has tentatively decided to promote closed-toe shoes, estimating that operating income will increase by $70,000 [operating income of $720,000 (20,000 units 3 $36) less promotion expenses of $650,000]. The manager also believes that the selection of open-toe shoes will decrease operating income by $38,000 [operating income of $612,000 ($34 operating income per unit for 18,000 units), less promotion expenses of $650,000]. State briefly your reasons for supporting or opposing the tentative decision.

Transcribed Image Text:

Closed-Toe Shoe Open-Toe Shoe Unit selling price $88 $110 Unit production costs: Direct materials $(22) $ (28) Direct labor (8) (6) Variable factory overhead Fixed factory overhead Total unit production costs Unit variable selling expenses Unit fixed selling expenses (4) (4) (6) (14) $(40) $ (52) (10) (10) (2) (14) $ (76) $ 34 Total unit costs $(52) Operating income per unit $ 36