The Derby Shoe Company produces its famous shoe, the Divine Loafer, which sells for $ 70 per pair. Operating income for 2012 is as follows:
Sales revenue ($ 70 per pair)..... $ 280,000
Variable cost ($ 30 per pair) ...... 120,000
Contribution margin ........ 160,000
Fixed cost ............. 80,000
Operating income .......... $ 80,000
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 15% decrease in variable cost per unit, but a 10% increase in fixed costs. Sales would remain the same.
2. Spend $ 20,000 on a new advertising campaign, which would increase sales by 40%.
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 15%.
4. Add a second manufacturing facility, which 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?

  • CreatedJanuary 15, 2015
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