Reference no: EM132687513
Problem - Differential Analysis for Sales Promotion Proposal
L'Essence Cosmetics Company is planning a one-month campaign for June 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:
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Moisturizer
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Perfume
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Unit selling price
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$50
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$55
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Unit production costs:
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Direct materials
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$ 9
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$12
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Direct labor
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3
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4
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Variable factory overhead
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2
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3
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Fixed factory overhead
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5
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6
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Total unit production costs
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$19
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$25
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Unit variable selling expenses
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16
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15
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Unit fixed selling expenses
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9
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5
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Total unit costs
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$44
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$45
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Operating income per unit
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$ 6
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$10
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No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 24,000 additional units of moisturizer or 20,000 additional units of perfume could be sold without changing the unit selling price of either product.
Instructions -
1. Prepare a differential analysis as of June 15, 2012, to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2).
2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $50,000 ($10 operating income per unit for 20,000 units, less promotion expenses of $150,000). The manager also believed that the selection of moisturizer would reduce operating income, ($6,000) ($6 operating income per unit for 24,000 units, less promotion expenses of $150,000). State briefly your reasons for supporting or opposing the tentative decision.