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 $135,539 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	$55.23	$59.67
3	Unit production costs:
4	Direct materials	$9.01	$13.94
5	Direct labor	3.02	5.00
6	Variable factory overhead	3.07	4.94
7	Fixed factory overhead	6.00	3.98
8	Total unit production costs	$21.10	$27.86
9	Unit variable selling expenses	16.02	14.94
10	Unit fixed selling expenses	12.07	5.93
11	Total unit costs	$49.19	$48.73
12	Operating income per unit	$6.04	$10.94

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 $83,261 ($10.94 operating income per unit for 20,000 units, less promotion expenses of $135,539). The manager also believed that the selection of perfume would reduce operating income by $2,659 ($6.04 operating income per unit for 22,000 units, less promotion expenses of $135,539). State briefly your reasons for supporting or opposing the tentative decision.

Labels
Cash flows from investing activities
Cash flows from operating activities
Costs
Amount Descriptions
Cash payments for merchandise
Cash received from customers
Direct labor
Direct materials
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Sales promotion
Variable factory overhead
Variable selling expenses

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.

Differential Analysis

Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)

November 2

1		Promote Moisturizer	Promote Perfume	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
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10

Answer 1

Differential AnalysisPromote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2
	Promote Moisturizer	Promote Perfume	Differential Effect On Income
Revenues	1215060	1193400	-21660
Costs
Direct materials	-198220	-278800	-80580
Direct labor	-66440	-100000	-33560
Variable factory overhead	-67540	-98800	-31260
Variable selling expenses	-352440	-358800	-6360
Sales promotion	-135539	-135539	0
Income (Loss)	394881	221461	-173420

Costs, except sales promotion, are the costs per unit multiplied by the increase in unit

volume for each cosmetic. Fixed costs are not relevant to the decision, so are not included.

2 Kankakee Cosmetics Companyr should Promote Moisturizer.

3

The sales manager’s tentative decision should be opposed. The sales manager

erroneously 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 moisturizer for the promotional

campaign, since this alternative will contribute $173420 ($394881 – $221461)

more to operating income than would be contributed by promoting perfume