Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 38

Differential analysis for sales promotion proposal
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:

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.
Instructions
1. Prepare a differential analysis as of August 21 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 $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.