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 $150,000 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:?

1		Moisturizer	Perfume
2	Unit selling price	$35.00	$55.00
3	Unit production costs:
4	Direct materials	$12.00	$20.00
5	Direct labor	8.00	10.00
6	Variable factory overhead	3.00	6.00
7	Fixed factory overhead	2.00	6.00
8	Total unit production costs	$25.00	$42.00
9	Unit variable selling expenses	2.00	3.00
10	Unit fixed selling expenses	2.00	8.00
11	Total unit costs	$29.00	$53.00
12	Operating income per unit	$6.00	$2.00

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 40,000 additional units of moisturizer or 30,000 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 $50,000 ($5 operating income per unit for 40,000 units, less promotion expenses of $150,000). The manager also believed that the selection of perfume would reduce operating income by $90,000 ($2 operating income per unit for 30,000 units, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision. 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.

Answer 1

1. Kankakee Cosmetics Company

Differential Analysis: Whether to promote the moisturizer ( Alternative 1) or the perfume ( Alternative 2).

	Alternative 1	Alternative 2	Increase ( decrease) in NOI
Incremental Sales Revenue	$ 1,400,000	$ 1,650,000	$ 250,000
Incremental Variable Expenses
Direct Materials	480,000	600,000	- 120,000
Direct Labor	320,000	300,000	20,000
Variable Factory Overhead	120,000	180,000	- 60,000
Variable Selling Expenses	80,000	90,000	- 10,000
Total Variable Expenses	- 1,000,000	- 1,170,000	- 170,000
Incremental Contribution Margin	$ 400,000	$ 480,000	80,000
Incremental Fixed Cost ( Promotion Expense)	150,000	150,000	0
Incremental Operating Income	$ 250,000	$ 330,000	$ 80,000

As per the differential analysis above, it is obvious that the perfume should be promoted, and not the moisturiser, as that would yield an additional operating income of $ 80,000.

Fixed factory overhead and fixed selling expenses are not relevant, as they remain unchanged regardless of the decision.