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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

Sole Mates Inc. is planning a one-month campaign for July to promote sales of one of its two shoe products. A total of $100,000 has been budgeted for advertising, contests, redeemable coupons, and oilier promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign:

 

Tennis

Shoe

Walking

Shoe

Unit selling price $85 $100
Unit production costs;    
Direct materials $19 $32
Direct labor 8 12
Variable factory overhead 7 5
Fixed factory overhead 16 11
Total unit production costs $50 $60
Unit variable selling expenses 6 10
Unit fixed selling expenses 20 15
Total unit costs $76 $85
Operating income per unit $9 $15

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 7,000 additional units of tennis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of either product.

Instructions

1.    Prepare a differential analysis as of June 19 to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).

2.    The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by $5,000 ($15 operating income per unit for 7,000 units less promotion expenses of $100,000). The manager also believed that the selection of tennis shoes would reduce operating income by $37,000 ($9 operating income per unit for 7,000 units less promotion expenses of $100,000). State briefly your reasons for supporting or opposing the tentative decision.

a)

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 SM as on June 19, to decide whether to promote tennis shoes or walking shoes, on an additional production of 7,000 units.

Explanation

The differential analysis of Company SM as on June 19 for the given alternatives is shown below.

Differential Analysis of Company SM
Promote Tennis Shoes (Alt. 1) or Promote Walking Shoes (Alt. 2)
June 19

Promote

Tennis Shoes  (Alternative 1)

Promote Walking Shoes (Alternative 2) Differential effect on income
Revenues from additional units (1)      $595,000 (2)      $700,000 $105,000
Costs for additional units    
   Direct Material (3) (-) $133,000 (4) (-) $224,000 (-)  $91,000
   Direct Labor (5)  (-)  $56,000 (6)  (-)  $84,000 (-)  $28,000
   Variable Factory Overhead (7)  (-)  $49,000 (8)  (-)  $35,000 $14,000
   Variable operating expenses (9)  (-)  $42,000 (10) (-) $70,000 (-)  $28,000
   Sales promotion  (-) $100,000 (-) $100,000 $0
Income (loss) $215,000 $187,000 (-)  $28,000

 Table (1)

The differential analysis of Company SM as on June 19 shows that promoting Tennis Shoes may increase the income by $28,000; hence Company SM should promote Tennis shoes.

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 revenues from sale of Tennis Shoes.

Revenues = $85 × 7,000 shoes= $595,000

(1)

Calculate the revenues from sale of Walking Shoes.

Revenues  = $100 × 7,000 shoes= $700,000

(2)

Calculate the direct material for producing Tennis Shoes

b)

To determine

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

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