Kankakee Cosmetics Company is planning a one-month campaign for December to prom
ID: 2580252 • 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:
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.
Required: 1. Prepare a differential analysis as of November 2 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 moisturizer estimating that operating income would be increased by $50,000 ($5 operating income per unit for 40,000 units, less promotion expenses of $150,000). The manager also believed that the selection of perfume would reduce operating income by $90,000 ($2 operating income per unit for 30,000 units, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision. Instructions 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 Moisturizer Perfume Unit selling price $35.00 $55.00 2 3 Unit production costs: 12.00 8.00 3.00 2.00 $25.00 2.00 2.00 $29.00 6.00 $20.00 10.00 6.00 6.00 42.00 3.00 8.00 53.00 $2.00 4 Direct materials Direct labor 5 6 Variable factory overhead Fixed factory overhead 8Total unit production costs 9 Unit variable selling expenses 10 Unit fixed selling expenses 1 Total unit costs 12 Operating income per unit 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.Explanation / Answer
Differential Analysis: Only Incremental Revenues and Costs are considered in Differential Analysis
Moisturizer(Alternative 1)
Perfume(Alternative 2)
Differential Effect on Income(Alternative 2)
Revenues
40000*35 = 1400,000
30000*55 = 1650,000
250,000
Costs:
Direct labor
40000*8 = 320,000
30000*10 = 300000
20,000
Direct material
40000*12 = 480,000
30000*20 = 600000
-120000
Sales promotion
150000
150000
0
Variable factory Overhead
40000*3 = 120,000
30000*6 = 180,000
-60,000
Variable Selling Overhead
40000*2 = 80,000
30000*3 = 90,000
-10,000
Income(loss)
250,000
330,000
80,000
2.Hence, Perfumes should be promoted (Alternative 2) Because of extra income of 80,000
3. The manager’s decision is not right.
Since the spare capacity exists, no additional fixed costs will be incurred for the production of any of the products, Hence only the variable cost will be charged for these additional units
Hence, profit from Moisturizer = 10*40,000 – 150,000 = 400,000-150,000 = 250,000
And profit from Perfume = 16*30,000 – 150,000 = 480,000-150,000 = 330,000
Moisturizer(Alternative 1)
Perfume(Alternative 2)
Differential Effect on Income(Alternative 2)
Revenues
40000*35 = 1400,000
30000*55 = 1650,000
250,000
Costs:
Direct labor
40000*8 = 320,000
30000*10 = 300000
20,000
Direct material
40000*12 = 480,000
30000*20 = 600000
-120000
Sales promotion
150000
150000
0
Variable factory Overhead
40000*3 = 120,000
30000*6 = 180,000
-60,000
Variable Selling Overhead
40000*2 = 80,000
30000*3 = 90,000
-10,000
Income(loss)
250,000
330,000
80,000
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