Chapter 3, Problem 3.42P

CVP, sensitivity analysis. 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%. To do so, the company is considering the following options:

1. 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.

Required

1. 2. Spend $25,000 on a new advertising campaign, which would increase sales by 10%.
2. 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%.
3. 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?