Question

Differential Analysis for Sales Promotion Proposal

Kankakee Cosmetics Company is planning a one-month campaign for December to promote sales of one of its two cosmetics products. A total of $150,000 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			$35			$55
Unit production costs:
	Direct materials		$(12)			$(20)
	Direct labor		(8)			(10)
	Variable factory overhead		(3)			(6)
	Fixed factory overhead		(2)			(6)
	Total unit production costs		$(25)			$(42)
Unit variable selling expenses			(2)			(3)
Unit fixed selling expenses			(2)			(8)
	Total unit costs		$(29)			$(53)
Operating income per unit			$ 6			$ 2

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 40,000 additional units of moisturizer or 30,000 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 November 2 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). If an amount is zero, enter "0".

Differential Analysis
Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2)
November 2
	Promote Moisturizer (Alternative 1)	Promote Perfume (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling expenses
Sales promotion
Profit (loss)	$	$	$

Feedback

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.

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

3. The sales manager had tentatively decided to promote moisturizer estimating that operating income would be increased by $90,000 ($6 operating income per unit times 40,000 units for a total of $240,000, less promotion expenses of $150,000). The manager also believed that the selection of perfume would reduce operating income by $90,000 ($2 operating income per unit times 30,000 units for a total of $60,000, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision.

The sales manager's tentative decision should be accepted . The sales manager correctly  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 moisturizer

Answer 1

Solution 1:

Differential Analysis - Kankakee Cosmetic Company
Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)
Particulars	Promote Moisturizer (Alt 1)	Promote Perfume (Alt 2)	Differential Effect on Income (Alt 2)
Additional Sales revenue	$1,400,000.00	$1,650,000.00	$250,000.00
Costs:
Direct labor	-$320,000.00	-$300,000.00	$20,000.00
Direct material	-$480,000.00	-$600,000.00	-$120,000.00
Sales Promotion	-$150,000.00	-$150,000.00	$0.00
Variable factory overhead	-$120,000.00	-$180,000.00	-$60,000.00
Variable selling expenses	-$80,000.00	-$90,000.00	-$10,000.00
Income (Loss)	$250,000.00	$330,000.00	$80,000.00

Solution 2:

It is recommended to Promote Perfume.

Solution 3:

An analysis similar to that presented in part (1) would lead to the selection of perfume for the promotional campaign because this alternative will contribute more  to operating income than would be contributed by promoting moisturizer.