The Derby Shoe Company produces its famous shoe, the Divine Loafer that sells for $ 70 per


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?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Cost Accounting A Managerial Emphasis

ISBN: 978-0133428704

15th edition

Authors: Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan

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