Question

Rocket Shoe Company is planning a one-month campaign for August to promote sales of one of its two shoe products. A total of $113,000 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. Cross-Trainer Shoe Running ShoeUnit selling price $41 $45 Unit production costs: Direct materials $(8) $(10) Direct labor (3) (3) Variable factory overhead (2) (3) Fixed factory overhead (3) (4) Total unit production costs $(16) $(20) Unit variable selling expenses (13) (12) Unit fixed selling expenses (8) (4) Total unit costs $(37) $(36) Operating income per unit $4 $9No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 24,000 additional units of cross-trainer shoes or 20,000 additional units of running shoes could be sold without changing the unit selling price of either product.Required:Prepare a differential analysis report presenting the additional revenue and additional costs anticipated from the promotion of cross-trainer shoes and running shoes.

Answer 1

Answer:

Contribution Margin from proposal

Cross Trainer Shoes $360,000

Running Shoe $340,000

Explanation:

Preparation of differential analysis for Rocket Shoe Company

DIFFERENTIAL ANALYSIS

Cross Trainer Shoes Running Shoe

Differential Revenue 984,000 900,000

Differential costs:

Direct Material (192,000) (200,000)

Direct labor (72,000) (60,000)

Variable factory overhead (48,000) (60,000)

Variable selling expense (312,000) (240,000)

Differential cost (624,000) (560,000)

Contribution Margin from proposal 360,000 340,000

Differential Revenue

Cross Trainer Shoes(41*24,000)=$984,000

Running Shoe(45*20,000) =$900,000

Differential costs:

Direct Material

Cross Trainer Shoes (8*24,000)=192,000

Running Shoe(10*20,000)=200,000

Direct labor

Cross Trainer Shoes (3*24,000)=72,000

Running Shoe(3*20,000)=60,000

Variable factory overhead

Cross Trainer Shoes (2*24,000)=48,000

Running Shoe(3*20,000)=60,000

Variable selling expense

Cross Trainer Shoes (13*24,000)=312,000

Running Shoe(12*20,000)=240,000

Differential cost is the addition of direct materials +direct labor + Variable factory overhead+Variable selling expense

Contribution Margin from proposal

Cross Trainer Shoes 984,000-624,000=360,000

Running Shoe 900,000-560,000=340,000

Since Cross trainer shoes had $360,000 this means that cross trainer shoes would contribute more than Running shoe which had $340,000 because Cross trainer shoes contribution margin is higher.