Differential Analysis for Sales Promotion Proposal L\'Essence Cosmetics Company
ID: 2730554 • Letter: D
Question
Differential Analysis for Sales Promotion Proposal L'Essence Cosmetics Company is planning a one-month campaign for June to promote sales of one of its two cosmetics products. A total of $118,000 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 $61 Unit production costs: Direct materials $ 10 $13 Direct labor 3 4 Variable factory overhead 2 3 Fixed factory overhead 6 7 Total unit production costs $21 $27 Unit variable selling expenses 18 16 Unit fixed selling expenses 10 7 Total unit costs $49 $50 Operating income per unit $ 6 $ 11 No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 28,000 additional units of moisturizer or 23,000 additional units of perfume could be sold without changing the unit selling price of either product. Required: Hide 1. Prepare a differential analysis as of June 15, 2014, to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). If an amount is zero, enter zero "0". Differential Analysis Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2) June 15, 2014 Promote Moisturizer (Alternative 1) Promote Perfume (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Direct materials Direct labor Variable factory overhead Variable selling expenses Sales promotion Income (Loss) $ $ $ 2. Determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). 3. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $135,000 ($11 operating income per unit for 23,000 units, less promotion expenses of $118,000). The manager also believed that the selection of moisturizer would increase operating income only by, $50,000 ($6 operating income per unit for 28,000 units, less promotion expenses of $118,000). State briefly your reasons for supporting or opposing the tentative decision. The sales manager's tentative decision should be . The sales manager considered the full unit costs instead of the differential (additional) revenue and differential (additional) costs. An analysis similar to that presented in part (1) would lead to the selection of for the promotional campaign, since this alternative will contribute to operating income than would be contributed by promoting .Explanation / Answer
Amt in $ Differential analysis Moisturiser Perfume Unit selling cost 55 61 Unit Production Costs Variable costs Direct Materials 10 13 Direct Labor 3 4 Variable factory Overhead 2 3 Unit variable selling Expenses 18 16 Total Unit Variable cost 33 36 Unit Contribution Margin 22 25 Additional units to be sold 28,000 23,000 1 Total Additional contribution margin 616,000 575,000 Less Additional advertisement cost 118,000 118,000 Additional net oprating income 498,000 457,000 2 As fixed costs will remain same, and the additional income margin from the sale of moisturiser is more than that of perfume, Moisturiser can be selected for advertisement campaign. 3 The sales Manager has calculated full unit cost instead of differential cost and revenue apprach . The differential contribution margin and cost approach should be taken as in the given working.
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