Answer:
Explanation:
1.) Promote Moisturizer or Promote Perfume
21-Aug
Promote Moisturizer Promote Perfume Differential Effect
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues 22,000 units x $55.32 = $1,217,040 20,000 units x $59.64 = $1,192,800 ($24,240)
Costs:
Direct Materials 22,000 units x $9.05 = $199,100 20,000 units x $14 = $280,000 ($80,900)
Direct Labor 22,000 units x $3.06 = $67,320 20,000 units x $4.93 = $98,600 ($31,280)
Variable Factory Overhead 22,000 units x $3.04 = $66,880 20,000 units x $4.93 = $98,600 ($31,720)
Variable Selling expenses 22,000 units x $16.02 = $199,100 20,000 units x $14.97 = $299,400 $53,040
Sales Promotion $136,430 $136,430 $0
Income (Loss) $394,870 $279,770 ($115,100)
Alternative 1 income = $394,870
Alternative 2 income = $279,770
Alternative 3 income = $115,100
2.) The company should promote moisturizer (Alternative 1)
3.) The decision of the manager is absolutely wrong as the manager is of the view that operating income will increase by $82,170 because he has considered the fixed expenses too which are not going to occur as we can see in the question. Hence the fixed expenses is irrelevant to cost to choose the alternative. As per the differential analysis, Alternative 1 i.e to sale moisturizer extra with the help of the promotion expenses.
