Differential Analysis for Sales Promotion Proposal L\'Essence Cosmetics Company

Question

Differential Analysis for Sales Promotion Proposal

L'Essence Cosmetics Company is planning a one-month campaign for June to promote sales of one of its two cosmetics products. A total of $105,000 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 30,000 additional units of moisturizer or 25,000 additional units of perfume could be sold without changing the unit selling price of either product.

Required:

1. Prepare a differential analysis as of June 15, 2014, to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). If an amount is zero, enter zero "0".

Differential Analysis

Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2)

June 15, 2014

Promote Moisturizer (Alternative 1)

Promote Perfume (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs:

Direct materials

  

  

  

Direct labor

  

  

  

Variable factory overhead

  

  

  

Variable selling expenses

  

  

  

Sales promotion

  

  

  

Income (Loss)

$  

$  

$

    Moisturizer     Perfume Unit selling price $44 $48 Unit production costs: Direct materials $ 8 $11 Direct labor 3 4 Variable factory overhead 2 3 Fixed factory overhead 4 4 Total unit production costs $17 $22 Unit variable selling expenses 14 13 Unit fixed selling expenses 8 5 Total unit costs $39 $40 Operating income per unit $ 5 $ 8

Explanation / Answer

Promote Moisturizer (Alternative 1) Promote Perfume (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 44 48 4 Costs: 17 22 5 Direct materials 8 11 3 Direct labor 3 4 1 Variable factory overhead 2 3 1 Variable selling expenses 4 4 0 Sales promotion -48.2 -56.8 -8.6 Income (Loss) 29.8 35.2 5.4

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