2) D'Lites Memory Foam Shoes are one of the most popular and most sold shoes of Sketchers. Each shoe pair sells for $60 per pair. Operating income for D'Lites Memory Foam Shoes for 2017 is provided in the table below. Sales revenue ($60 per pair) Variable cost ($25 per pair) Contribution margin $300,000 125,000 175,000 Fixed cost 100,000 Operating income $ 75,000 To increase profitability Sketchers hired and tasked Mr. Henry George to evaluate a few options. Furthermore, Sketchers aims to have an increase of at least 25%. The options Mr. George is considering are listed as follows: a. Implementing an automated machining process to replace some portion of the current processes requiring variable labor. (This change would decrease variable cost per unit by 20% and increase fixed costs by 15%, whereas the sales would remain the same.) b. Start a new advertising campaign, which costs $30,000, to promote sales. (This option would result in an increase in sales by 20%.) c. Make changes in costing by using a higher quality material for the production. (By doing so, both selling price and variable costs per unit would increase by $10 per unit and $7 per unit respectively. This increase in price would cause demand to decrease by 10% approximately.) d. Increase the production by building an additional manufacturing facility. (This would result fixed costs to be doubled and sales to be increased by 60%.) After the evaluation of each of the alternatives being considered, answer the following questions: 1. What decision should Mr. George make in order to meet or exceed the targeted increase in income of 25%? Explain and provide your calculations. 2. Do any of the options meet or exceed the targeted increase in income of 25%?
2) D'Lites Memory Foam Shoes are one of the most popular and most sold shoes of Sketchers. Each shoe pair sells for $60 per pair. Operating income for D'Lites Memory Foam Shoes for 2017 is provided in the table below. Sales revenue ($60 per pair) Variable cost ($25 per pair) Contribution margin $300,000 125,000 175,000 Fixed cost 100,000 Operating income $ 75,000 To increase profitability Sketchers hired and tasked Mr. Henry George to evaluate a few options. Furthermore, Sketchers aims to have an increase of at least 25%. The options Mr. George is considering are listed as follows: a. Implementing an automated machining process to replace some portion of the current processes requiring variable labor. (This change would decrease variable cost per unit by 20% and increase fixed costs by 15%, whereas the sales would remain the same.) b. Start a new advertising campaign, which costs $30,000, to promote sales. (This option would result in an increase in sales by 20%.) c. Make changes in costing by using a higher quality material for the production. (By doing so, both selling price and variable costs per unit would increase by $10 per unit and $7 per unit respectively. This increase in price would cause demand to decrease by 10% approximately.) d. Increase the production by building an additional manufacturing facility. (This would result fixed costs to be doubled and sales to be increased by 60%.) After the evaluation of each of the alternatives being considered, answer the following questions: 1. What decision should Mr. George make in order to meet or exceed the targeted increase in income of 25%? Explain and provide your calculations. 2. Do any of the options meet or exceed the targeted increase in income of 25%?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:2) D'Lites Memory Foam Shoes are one of the most popular and most sold shoes of
Sketchers. Each shoe pair sells for $60 per pair. Operating income for D'Lites Memory
Foam Shoes for 2017 is provided in the table below.
Sales revenue ($60 per pair)
Variable cost ($25 per pair)
Contribution margin
$300,000
125,000
175,000
100,000
$ 75,000
Fixed cost
Operating income
To increase profitability Sketchers hired and tasked Mr. Henry George to evaluate a
few options. Furthermore, Sketchers aims to have an increase of at least 25%. The
options Mr. George is considering are listed as follows:
a. Implementing an automated machining process to replace some portion of the
current processes requiring variable labor. (This change would decrease variable cost
per unit by 20% and increase fixed costs by 15%, whereas the sales would remain the
same.)
b. Start a new advertising campaign, which costs $30,000, to promote sales. (This
option would result in an increase in sales by 20%.)
c. Make changes in costing by using a higher quality material for the production. (By
doing so, both selling price and variable costs per unit would increase by $10 per unit
and $7 per unit respectively. This increase in price would cause demand to decrease
by 10% approximately.)
d. Increase the production by building an additional manufacturing facility. (This would
result fixed costs to be doubled and sales to be increased by 60%.)
After the evaluation of each of the alternatives being considered, answer the following
questions:
1. What decision should Mr. George make in order to meet or exceed the targeted
increase in income of 25%? Explain and provide your calculations.
2. Do any of the options meet or exceed the targeted increase in income of 25%?
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