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 $100,000 has been budgeted for advertising, contests, redeem- able 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

 

 

 

 

 

SHOW ME HOW

 

 

Unit selling price                                                            $85                $100 Unit production costs:

 

Direct materials                                                       $19                $  32

 

Direct labor                                                                      8                      12

 

Variable factory overhead                                      7                         5

 

Fixed  factory overhead                                      16                   11 Total  unit production costs              $50               $  60

 

Unit variable selling expenses                                   6                      10

 

Unit  fixed  selling expenses                                    20                   15 Total unit costs                   $76                                       $  85 Operating income per  unit                                    $  9                $  15

 

                             

 

 

 

No increase in facilities would be necessary to  produce  and  sell  the  increased output. It is anticipated that 7,000 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 June 19 to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).

 

2.     The sales manager had tentatively decided to promote walking shoes, esti- mating that operating income would be increased by $5,000 ($15 operating income per unit for 7,000 units, less promotion expenses of $100,000). The manager also believed that the selection of tennis shoes would reduce operating income by $37,000 ($9 operating income per unit for 7,000 units, less promotion expenses of $100,000). State briefly your reasons for supporting or opposing the tentative decision.