Reference no: EM132687534

Problem - Differential analysis for sales promotion proposal

Sole Mates Inc. is planning a one-month campaign for May to promote sales of one of its two shoe products. A total of $130,000 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.

	Tennis Shoe	Walking Shoe
Unit selling price	$120	$92
Unit production costs:
Direct materials	$ 24	$20
Direct labor	10	9
Variable factory overhead	6	5
Fixed factory overhead	14	12
Total unit production costs	$ 54	$46
Unit variable selling expenses	8	6
Unit fixed selling expenses	20	15
Total unit costs	$82	$67
Operating income per unit	$38	$25

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 5,000 additional units of tennis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of either product.

Instructions -

1. Prepare a differential analysis as of May 13, 2012, to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).

2. The sales manager had tentatively decided to promote tennis shoes, estimating that operating income would be increased by $60,000 ($38 operating income per unit for 5,000 units, less promotion expenses of $130,000). The manager also believed that the selection of walking shoes would increase operating income by $45,000 ($25 operating income per unit for 7,000 units, less promotion expenses of $130,000). State briefly your reasons for supporting or opposing the tentative decision.