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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for sales promotion proposal

Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $140,000 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 $55 $60
Unit production costs:    
Direct materials $9 $14
Direct labor 3 5
Variable factory overhead 3 5
Fixed factory overhead 6 4
Total unit production costs $21 $28
Unit variable selling expenses 16 15
Unit fixed selling expenses 12 6
Total unit costs $49 $49
Operating income per unit $6 $11

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.

Instructions

1.    Prepare a differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2).

2.    The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $80,000 ($11 operating income per unit for 20,000 units less promotion expenses of $140,000). The manager also believed that the selection of moisturizer would reduce operating income by $8,000 ($6 operating income per unit for 22,000 units less promotion expenses of $140,000). State briefly your reasons for supporting or opposing the tentative decision.

1.

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company PC as on August 21, to decide whether to promote moisturizer, on an additional production of 22,000 units or perfumes, on an additional production of 20,000 units.

Explanation

The differential analysis of Company PC as on August 21 for the given alternatives is shown below.

Differential Analysis of Company PC
Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2)
August 21
Promote Moisturizer (Alternative 1)Promote Perfume   (Alternative 2)Differential effect on income
Revenue from additional units(1)   $1,210,000(2)     $1,200,000(-)  $10,000
Costs for additional units  
   Direct Materials(3)   (-) $198,000(4)   (-) $280,000(-)  $82,000
   Direct Labor(5)    (-)  $66,000(6)   (-) $100,000(-)  $34,000
   Variable Factory Overhead(7)    (-)  $66,000(8)   (-) $100,000(-)  $34,000
   Variable selling expenses(9)    -) $352,000(10)  (-) $300,000$52,000
   Sales promotion(-)  $140,000(-)  $140,000$0
Income (loss)$388,000$280,000(-)  $108,000

 Table (1)

The differential analysis of Company PC as on August 21 shows that promoting Moisturizer may increase the income by $108,000; hence Company PC should promote Moisturizer.

Note: The fixed costs are not taken into calculation as they are not relevant to the decision being made in this situation.

Working Note:

Calculate the revenue from sale of moisturizer.

Revenue = $55 × 22,000 units= $1,210,000 (1)

Calculate the revenues from sale of perfumes.

Revenue  = $60 × 20,000 units= $1,200,000 (2)

Calculate the direct materials for producing moisturizer

2.

To determine

To State: The reasons for supporting or opposing the tentative decision.

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