The Derby Shoe Company produces its famous shoe, the Divine Loafer that sells for $ 70 per pair. Operating income for 2013 is as follows:
Sales revenue ($ 70 per pair) ...... $ 350,000
Variable cost ($ 30 per pair) ...... 150,000
Contribution margin ......... 200,000
Fixed cost ............... 100,000
Operating income ........... $ 100,000
Derby Shoe Company would like to increase its profitability over the next year by at least 25%. To do so, the company is considering the following options:

1. Replace a portion of its variable labor with an automated machining process. This would result in a 20% decrease in variable cost per unit but a 15% increase in fixed costs. Sales would remain the same.
2. Spend $ 25,000 on a new advertising campaign, which would increase sales by 10%.
3. Increase both selling price by $ 10 per unit and variable costs by $ 8 per unit by using a higher- quality leather material in the production of its shoes. The higher- priced shoe would cause demand to drop by approximately 20%.
4. Add a second manufacturing facility that would double Derby’s fixed costs but would increase sales by 60%.
Evaluate each of the alternatives considered by Derby Shoes. Do any of the options meet or exceed Derby’s targeted increase in income of 25%? What should Derby do?

  • CreatedMay 14, 2014
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