Question

September to promote sales of one...

Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $140,000 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:

Moisturizer Perfume

Unit selling proce $55 $60

Unit production costs:

Direct materials $9 $14

Direct labor 3 5

Variable factory overhead 3 5

Fixed factory overhead 6 4

Total unit production costs $21 $28

Unit variable selling expenses 16 15

Unit fixed selling expenses 12 6

Total unit costs $49 $49

Operating income per unit $6 $11

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.

1. Prepare the differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). See template

2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $80,000 ($11 operating income per unit for 20,000 units, less promotion expenses of $140,000). The manager also believed that the selection of moisturizer would reduce operating income by $8,000 ($6 operating income per unit for 22,000 units, less promotion expenses of $140,000). State briefly your reasons for supporting or opposing the tentative decision.

  

Differential Analysis

Promote Moisturizer or Promote Perfume

1. August 21

Promote Promote Differential Effect

Moisturizer Perfume on Income

(Alternative 1) (Alternative 2) (Alternative 2)

Revenues

Costs:

Direct materials

Direct labor

Variable factory overhead

Variable operating expenses

Sales promotion

Income (loss)

Parisian should promote the moisturizer.

2. Essay answer:

Answer 1

Solution

Part 1

Parisian Cosmetics Company

	Promote Moisturiser	Promote Perfume	Differential Effect on Income
Revenues	$12,10,000 (22,000 units x $55 )	$ 12,00,000 (20,000 units x $ 60)	-$10,000
Costs :
Direct Material	$198,000 (22,000 units x $9)	$2,80,000 (20,000 units x $14)	$82,000
Direct Labour	$66,000 (22,000 units x $3)	$100,000 (20,000 units x $5)	$ 34,000
Variable Factory Overhead	$66,000 (22,000 units x $3)	$100,000 (20,000 units x $5)	$ 34.000
Variable Operating Expenses (selling expenses)	$352,000 (22,000 units x $16)	$300,000 (20,000 units x $15)	-$100,000
Sales Promotion (given)	$140,000	$140,000	0
Income (loss)	$388,000	$280,000	-$108,000

Parisian should promote the Moisturiser

Part 2

I strongly disagree with the sale manager's decision.

He is considering the operating income per unit for making decision irrespective of the fact that operating income per unit has been calculated after deducting fixed factory overhead & fixed selling expenses.

These expenses are irrelevant and therefore, should not be considered.

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