Question
PR 24-3B 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, rede able 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: OBJ.1 1. Differential revenue, $105,000 Tennis Walking Shoe Unit selling price Unit production costs 100 ME HOW $19 s 32 Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit production costs 5 60 Unit variable selling expenses Unit fixed selling expenses 20 519dd 15 5 85 $15 Total unit costs Operating income per unit 5 g - No increase in acilities would b ncessary to produe an the increased outpu. I is aniipaed hat 7,000 aditnal units of nis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of cither ac product. . Prepare a differential analysis as of Junc 19 to determine whether to promote tennis shoes (Alternative 1) or walking shocs (Alternative 2). 2· The sales manager had tentatively decided to promote walking shoes, esti- mating that operating income would be incrased by $5,000 ($15 operating inme per u 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 uit for 7,000 units, less promotion expenses of $100,000). State briefly your reasons for supporting or opposing the tentative decision
Explanation / Answer
For Decision making we should analyse contribution per unit of each product
Contribution per unit is (Selling price - Variable cost)
For Tennis Shoes cont. per unit is (85-(19+8+7+6)) = 45 per unit
For Walking Shoes (100-(32+12+5+10)) = 41 per unit
As contribution per unit is higher in Tennis shoes, we should promote Tennis shoes
2. Selection of Walking shoes should be opposed for folloing reasons:
