PR 24-3A Differential analysis for sales promotion proposal Parisian Cosmetics C

Question

PR 24-3A Differential analysis for sales promotion proposal Parisian Cosmetics Cpany is planning a onemth campaign for September topro- mote 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 fol lowing data have been assembled for their possible usefulness in deciding which of the products to select for the campaign: OBJ. 1 1, Differential revenue,-$10,000 Moisturizer Perfume $55 $60 Unit selling price Unit production costs: Direct materials Direct labor Variable factory cerhead Fixed factory overhead Total unit production costs $28 Unit variable selling expenses Unit fixed selling expenses 16 49 $49 $11 Total unit costs Operating income per unit No iu reas acs woukl be necessary loprduce and s he ncreased out put. It is anticipated that 22,000 additional units of moisturizer or 20,000 additional units of pertume could be sold from the campaign without changing the unit selling price of either Tduct Instructions 1. Prepare a ditferential analysis as of August 21 to determine whether to promote mois- turizer (Alermative 1 or perfue (Alternative 2). 2.The sales manager had tentatively decided to promote perfume, cstimating that operating inc'me would be increased bv $.000 ($11 operating income per unit for 20,000 uils, less promotion exensef $110,0) h e als bleved thal the selection of moisturizcr would reduce opcrating income by $8,000 ($6 opcrating income per unit for 22,000 units, less promotion expenses of $140,000). State bricfly your reasons for supporting or opposing the tentative decision.

Explanation / Answer

1. Differential analysis

Its better to promote alternative 1.

2. The tentative decision is not correct since the manager has also considered the fixed manufacturing and selling cost in this decision, which are irrelevant for this decision making.

Moisturizer (1) Perfume (2) Differential
effect on
net income
(1 - 2) Sales 22000 x $55
= $1210000 20000 x $60
= $1200000 10000 Less Relevant cost of manufacture: Direct materials 22000 x $9
= 198000 20000 x $14
= 280000 82000 Direct labor 22000 x 3
= 66000 20000 x $5
= 100000 34000 Variable factory overhead 22000 x 3
= 66000 20000 x $5
= 100000 34000 Total relevant cost to manufacture 330000 480000 150000 Gross margin 880000 720000 160000 Less variable selling expenses 22000 x $16
= 352000 20000 x $15
= 300000 -52000 Less cost of advertising 140000 140000 0 Net income $388000 $280000 $108000

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