Kankakee Cosmetics Company is planning a one-month campaign for December to prom
ID: 2404132 • Letter: K
Question
Kankakee Cosmetics Company is planning a one-month campaign for December to promote sales of one of its two cosmetics products. A total of $150,000 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:
1
Moisturizer
Perfume
2
Unit selling price
$35.00
$55.00
3
Unit production costs:
4
Direct materials
$12.00
$20.00
5
Direct labor
8.00
10.00
6
Variable factory overhead
3.00
6.00
7
Fixed factory overhead
2.00
6.00
8
Total unit production costs
$25.00
$42.00
9
Unit variable selling expenses
2.00
3.00
10
Unit fixed selling expenses
2.00
8.00
11
Total unit costs
$29.00
$53.00
12
Operating income per unit
$6.00
$2.00
No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 40,000 additional units of moisturizer or 30,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product.
1
Moisturizer
Perfume
2
Unit selling price
$35.00
$55.00
3
Unit production costs:
4
Direct materials
$12.00
$20.00
5
Direct labor
8.00
10.00
6
Variable factory overhead
3.00
6.00
7
Fixed factory overhead
2.00
6.00
8
Total unit production costs
$25.00
$42.00
9
Unit variable selling expenses
2.00
3.00
10
Unit fixed selling expenses
2.00
8.00
11
Total unit costs
$29.00
$53.00
12
Operating income per unit
$6.00
$2.00
Explanation / Answer
1. Differnetial analysis is the process of analysing between two alternatives course of action to determine the impact. Sometimes it is called incremental analysis and it analyzes the differential revenue and cost.
Differential Analysis- Promote Moisturizer (Alt 1) or Promote Perfume (Alt 2)
Promote Moisturizer
(40000 unit)
Promote Perfume
(30000 unit)
Differential Income
(On Alternative 2)
2. As per the analysis So Kankakee should promote Perfume.
* Except Sales promotion all other cost are multiplied by the increase in volume. fixed cost are not considered as they are not relevant for decision making.
3. The sales manager decision to promote moisturizer is incorrect since he has taken the full unit cost instead of the differential cost as presented above. While arriving at the decision the sales manager has considered the fixed cost, if he do the analysis similar to point 1 then he will know that by promoting perfume he will generate additional operating income of $80,000.
* Here in the question part 3 the operating unit is mentioned as $5 which I think should be $6.
Please let me know if you have any further query.
Promote Moisturizer
(40000 unit)
Promote Perfume
(30000 unit)
Differential Income
(On Alternative 2)
Revenue 1,400,000 1,650,000 250,000 Direct Material 480,000 600,000 (120,000) Direct Labor 320,000 300,000 20,000 variable factory overhead 120,000 180,000 (60,000) Variable selling expenses 80,000 90,000 (10,000) Sales promotion 150,000 150,000 - Income / (Loss) 250,000 330,000 80,000Related Questions
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