Question

Differential Analysis for Sales Promotion Proposal

Sole Mates Inc. is planning a one-month campaign for July to promote sales of one of its two shoe products. A total of $123,000 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 Shoes			Walking Shoes
Unit selling price			$66			$73
Unit production costs:
	Direct materials		$12			$16
	Direct labor		4			5
	Variable factory overhead		3			4
	Fixed factory overhead		6			8
	Total unit production costs		$25			$33
Unit variable selling expenses			21			20
Unit fixed selling expenses			12			7
	Total unit costs		$58			$60
Operating income per unit			$8			$13

No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of tennis shoes or 18,000 additional units of walking shoes could be sold from the campaign without changing the unit selling price of either product.

Required:

1. Prepare a differential analysis as of June 19 to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate subtracted amounts, negative amounts, or a loss.

Differential Analysis
Promote Tennis Shoes (Alt. 1) or Promote Walking Shoes (Alt. 2)
June 19
	Promote Tennis Shoes (Alternative 1)	Promote Walking Shoes (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling expenses
Sales promotion
Income (Loss)	$	$	$

Answer 1

Solution:

Differential Analysis - Sole Mates Inc.
Promote Tennis shoes (Alternative 1) or Promote Walking Shoes (Alternative 2)
Particulars	Promote Tennis Shoes (Alt 1)	Promote Walking (Alt 2)	Differential Effect on Income (Alt 2)
Additional Sales revenue	$1,452,000.00	$1,314,000.00	-$138,000.00
Costs:
Direct material	-$264,000.00	-$288,000.00	-$24,000.00
Direct labor	-$88,000.00	-$90,000.00	-$2,000.00
Sales Promotion	-$123,000.00	-$123,000.00	$0.00
Variable factory overhead	-$66,000.00	-$72,000.00	-$6,000.00
Variable selling expenses	-$462,000.00	-$360,000.00	$102,000.00
Income (Loss)	$449,000.00	$381,000.00	-$68,000.00