The Derby Shoe Company produces its famous shoe, the Divine Loafer, that sells for $70 per pair. Operating income for 2017 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%.  Q1. 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%. Q2. 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?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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The Derby Shoe Company produces its famous shoe, the Divine Loafer, that sells for $70 per pair. Operating income for 2017 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%. 

Q1. 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%.

Q2. 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?

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