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 $139,491 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	$55.36	$59.58
3	Unit production costs:
4	Direct materials	$9.08	$13.92
5	Direct labor	3.08	4.92
6	Variable factory overhead	3.05	4.93
7	Fixed factory overhead	6.10	3.98
8	Total unit production costs	$21.31	$27.75
9	Unit variable selling expenses	16.01	14.91
10	Unit fixed selling expenses	12.01	5.91
11	Total unit costs	$49.33	$48.57
12	Operating income per unit	$6.03	$11.01

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of moisturizer or 20,000 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 $80,709 ($11.01 operating income per unit for 20,000 units, less promotion expenses of $139,491). The manager also believed that the selection of perfume would reduce operating income by $6,831 ($6.03 operating income per unit for 22,000 units, less promotion expenses of $139,491). State briefly your reasons for supporting or opposing the tentative decision.

Answer 1

Solution 1:

Differential Analysis
Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)
S No	Particulars	Promote Moisturizer (Alt 1)	Promote Perfume (Alt 2)	Differential Effect on Income (Alt 2)
1	Additional Sales revenue	$1,217,920.00	$1,191,600.00	-$26,320.00
2	Additioal relevant Costs:
3	Direct material	$199,760.00	$278,400.00	$78,640.00
4	Direct labor	$67,760.00	$98,400.00	$30,640.00
5	Variable factory overhead	$67,100.00	$98,600.00	$31,500.00
6	Variable selling expenses	$352,220.00	$298,200.00	-$54,020.00
7	Additional advertising cost	$139,491.00	$139,491.00	$0.00
8	Total additional relevant cost	$826,331.00	$913,091.00	$86,760.00
9	Additonal net income	$391,589.00	$278,509.00	-$113,080.00

Solution 2:

Income from promoting moisturizer is higher than income from promoting perfumem, therefore mositurizer should be promoted.

Solution 3:

The analysis of sales manager is not correct. As sales manager is considering total cost per unit while arriving incrmental benefits from promotion, however fixed cost is not relevant for this decision and company will not incur any additional cost. Therefore only relevant cost should be compared with incremental revenue to determine the products to be promoted. Therefore in the basis of analysis done in part 1, moisturizer product should be promoted as it will result in higher profitability.