Problem Set 1The Carisole Company is involved in the manufacturing and sale of its unique sandal.Carisole's interplay of costs and production capacity prompts an analysis that will guide it innavigating the balance between revenue generation and cost management. As you analyseCarisole's scenario, critical financial data emerges laying the foundation for strategicdecision-making.The Carisole Company produces its sandal that sells for $70 per pair. Operating income for2023 is as follows:Sales revenue ($70 per pair) $350,000Variable cost ($30 per pair) 150,000Contribution margin 200,000Fixed cost 100,000Operating income $100,000Carisole 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 labour with an automated machining process. Thiswould 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 ahigher-quality leather material in the production of its shoes. The higher-priced shoe wouldcause demand to drop by approximately 20%.4. Add a second manufacturing facility that would double Carisole’s fixed costs but wouldincrease sales by 60%.Required 1. Calculate the existing (2023) unit sales and breakeven point? (In table format)2. What is the operating income for the alternatives considered by Carisole? 3. Evaluate each of the options indicating whether they meet or exceed Carisole’stargeted increase in income of 25%? What should Carisole do? 4. By reference to the above data:How can a company effectively use CPV (Cost-Volume-Profit) analysis to makestrategic decisions about its profitability?
Problem Set 1
The Carisole Company is involved in the manufacturing and sale of its unique sandal.
Carisole's interplay of costs and production capacity prompts an analysis that will guide it in
navigating the balance between revenue generation and cost management. As you analyse
Carisole's scenario, critical financial data emerges laying the foundation for strategic
decision-making.
The Carisole Company produces its sandal that sells for $70 per pair. Operating income for
2023 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
Carisole 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 labour 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 Carisole’s fixed costs but would
increase sales by 60%.
Required
1. Calculate the existing (2023) unit sales and breakeven point? (In table format)
2. What is the operating income for the alternatives considered by Carisole?
3. Evaluate each of the options indicating whether they meet or exceed Carisole’s
targeted increase in income of 25%? What should Carisole do?
4. By reference to the above data:
How can a company effectively use CPV (Cost-Volume-Profit) analysis to make
strategic decisions about its profitability?
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