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%. Q.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. Q2. Spend $25,000 on a new advertising campaign, which would increase sales by 10%. 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?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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%.
Q.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.
Q2. Spend $25,000 on a new advertising campaign, which would increase sales by 10%.
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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