In: Accounting
Differential Analysis Report for Sales Promotion Proposal
Rocket Shoe Company is planning a one-month campaign for August to promote sales of one of its two shoe products. A total of $182,000 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.
Cross-Trainer Shoe |
Running Shoe |
|||
Unit selling price | $77 | $85 | ||
Unit production costs: | ||||
Direct materials | $ (14) | $(18) | ||
Direct labor | (5) | (6) | ||
Variable factory overhead | (3) | (5) | ||
Fixed factory overhead | (7) | (9) | ||
Total unit production costs | $(29) | $(38) | ||
Unit variable selling expenses | (24) | (23) | ||
Unit fixed selling expenses | (14) | (8) | ||
Total unit costs | $(67) | $(69) | ||
Operating income per unit | $ 10 | $ 16 |
No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 26,000 additional units of cross-trainer shoes or 22,000 additional units of running shoes could be sold without changing the unit selling price of either product.
Required:
1. Prepare a differential analysis report presenting the additional revenue and additional costs anticipated from the promotion of cross-trainer shoes and running shoes.
Rocket Shoe Company | ||
Proposals for Sales Promotion Campaign | ||
Differential Analysis Report | ||
Cross-Trainer Shoes | Running Shoe | |
Differential revenue from proposals | $ | $ |
Differential cost of proposals: | ||
$ | $ | |
Differential cost of proposals | $ | $ |
$ | $ |
2. The sales manager had tentatively decided to
promote cross-trainer shoes, estimating that operating income would
be increased by $170,000 ($16 operating income per unit for 22,000
units, less promotion expenses of $182,000). The manager also
believes that the selection of running shoes will decrease
operating income by $78,000 ($10 operating income per unit for
26,000 units, less promotion expenses of $182,000). Should the
sales manager’s tentative decision be accepted or opposed?
The sales manager’s tentative decision should be_______.
The_______will contribute more to operating income than would be
contributed by promoting the________.
Ans.
1.
Rocket Shoe Company |
Proposals for Sales Promotion Campaign |
Differential Analysis Report |
Cross Trainer Shoes | Running Shoe | |
Differential Revenue | $ 2,002,000.00 | $ 1,870,000.00 |
Differential costs: | ||
Direct Material | $ (364,000.00) | $ (396,000.00) |
Direct labor | $ (130,000.00) | $ (110,000.00) |
Variable factory overhead | $ (78,000.00) | $ (132,000.00) |
Variable selling expense | $ (624,000.00) | $ (506,000.00) |
Sales Promotional Expenses | $ (182,000.00) | $ (182,000.00) |
Differential costs | $ (1,378,000.00) | $ (1,348,000.00) |
Contribution Margin from proposal | $ 624,000.00 | $ 544,000.00 |
Formulas
A/1 | B | C | D |
2 | Cross Trainer Shoes | Running Shoe | |
3 | Differential Revenue | =26000*77 | =22000*85 |
4 | Differential costs: | ||
5 | Direct Material | =-26000*14 | =-22000*18 |
6 | Direct labor | =-26000*5 | =-22000*6 |
7 | Variable factory overhead | =-26000*3 | =-22000*5 |
8 | Variable selling expense | =-26000*24 | =-22000*23 |
9 | Sales Promotional Expenses | -182000 | -182000 |
10 | Differential costs | =SUM(C5:C9) | =SUM(D5:D9) |
11 | Contribution Margin from proposal | =+C3+C10 | =+D3+D10 |
Cross trainer would contribute more than running shoe as its contribution margin is higher.
2.
The sales manager’s tentative decision should be opposed .
The Cross trainer will contribute more to operating income than would be contributed by promoting the Running Shoe as its contribution margin is higher.
This is because fixed cost is irrelevant in making decision.