Question

Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $136,430 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 $55.32 $59.64
Unit production costs:
Direct materials $ 9.05 $14.00
Direct labor 3.06 4.93
Variable factory overhead 3.04 4.93
Fixed factory overhead 6.03 3.93
Total unit production costs $21.18 $27.79
Unit variable selling expenses 16.02 14.97
Unit fixed selling expenses 12.04 5.95
Total unit costs $49.24 $48.71
Operating income per unit $ 6.08 $10.93

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of moisturizer or 20,000 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 August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
2. Determine whether to promote moisturizer (Alternative 1) or promote perfume (Alternative 2).
3. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $82,170 ($10.93 operating income per unit for 20,000 units, less promotion expenses of $136,430). The manager also believed that the selection of moisturizer would reduce operating income by $2,670 ($6.08 operating income per unit for 22,000 units, less promotion expenses of $136,430). State briefly your reasons for supporting or opposing the tentative decision.

1. Prepare a differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis
Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)
August 21

1 Promote Moisturizer
Promote Perfume
Differential Effect on Income
2 (Alternative 1)
(Alternative 2)
(Alternative 2)
3
4
5
6
7
8
9
10

Answer 1

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.