Problem: Lilac Cosmetics Company is planning a one-month campaign for May to promote sales of one of its two cosmetics products. A total of $90,000 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:
|
|
|
Cologne |
Perfume |
| Unit selling price |
|
$52 |
|
$65 |
| Unit production costs: |
|
|
|
| Direct materials |
|
$8 |
|
$12 |
| Direct labor |
4 |
|
6 |
| Variable factory overhead |
3 |
|
4 |
| Fixed factory overhead |
8 |
|
8 |
| Total unit production costs |
$23 |
|
$30 |
| Unit variable selling expenses |
16 |
|
20 |
| Unit fixed selling expenses |
4 |
|
2 |
| Total unit cost |
$43 |
|
$52 |
| Operating income per unit |
$9 |
|
$23 |
No increase in facilities would be necessary to produce and sell the increased output.
It is anticipated that 10,000 additional units of cologne or 9,000 additional units of perfume could be sold without changing the unit-selling price of either product.
Instructions:
1. Prepare a differential analysis report as of April 5, 2006, presenting the additional revenue and additional costs anticipated from the promotion of cologne and perfume.
2. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $27,000 ($13 operating income per unit for 9,000 units, less promotion expenses of $90,000). The manager also believed that the selection of cologne would have no impact on operating income ($9 operating income per unit for 10,000 units, less promotion expenses of $90,000).
State briefly your reasons for supporting or opposing the tentative decision.