Question

Chapter 10 Differential Analysis and Product Pricing 514 docted for advent ts. A total of activities. The following det nons, and other prosiding which of the products to see ✓ 1. Moisturizer differential revenue $250,000 PR 10-3A Differential analysis for sales promotion proposal Kankakee Cosmetics Company is planning a one-month campaign for Decen sales of one of its two cosmetics products. A total of $150,000 has been bude ing, contests, redeemable coupons, and other promotional activities. The follow been assembled for their possible usefulness in deciding which of the product the campaign: Moisturizer Perfume $35 $55 SHOW ME HOW EXCEL TEMPLATE $12 $20 Unit selling price Unit production costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit production costs Unit variable selling expenses Unit fixed selling expenses Total unit costs Operating income per unit $25 $42 56 No increase in facilities would be necessary to produce and sell the increased out 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 Instructions 1. Prepare a differential analysis as of November 2 to determine whether to promote moistur izer (Alternative 1) or perfume (Alternative 2). 2. The sales manager had tentatively decided to promote moisturizer estimating that operating income would be increased by $50,000 ($5 operating income per unit for 40,000 units, 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 30,000 units, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision.

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:

The tentative decision taken by manager is inappropriate as total cost consider by manager instead of relevant cost only. Above part clearly shows that Promoting perfume will result in higher income, therefore perfume to be promoted.