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, 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 Shoe Walking Shoe 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. Required: 1a. Prepare a differential analysis as of June 19. If an amount is zero, enter zero "0". Differential Analysis Promote Tennis Shoe (Alt. 1) or Promote Walking Shoe (Alt. 2) June 19 Promote Tennis Shoe (Alternative 1) Promote Walking Shoe (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Direct materials Direct labor Variable factory overhead Variable selling expenses Sales promotion Income (Loss) $ $ $ 1b. Determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
ex3.
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, 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 Shoe | Walking Shoe | |||||
| Unit selling price | $85 | $100 | ||||
| Unit production costs: | ||||||
| Direct materials | $19 | $32 | ||||
| Direct labor | 8 | 12 | ||||
| Variable factory |
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.
Required:
1a. Prepare a differential analysis as of June 19. If an amount is zero, enter zero "0".
| Differential Analysis | |||
| Promote Tennis Shoe (Alt. 1) or Promote Walking Shoe (Alt. 2) | |||
| June 19 | |||
| Promote Tennis Shoe (Alternative 1) | Promote Walking Shoe (Alternative 2) | Differential Effect on Income (Alternative 2) | |
| Revenues | $ | $ | $ |
| Costs: | |||
| Direct materials | |||
| Direct labor | |||
| Variable factory overhead | |||
| Variable selling expenses | |||
| Sales promotion | |||
| Income (Loss) | $ | $ | $ |
1b. Determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2).
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