The Brown Shoe Company produces its famous shoe, the Divine Loafer
that sells for $60 per pair. Operating income for 2011 is as follows:
Sales revenue ($60 per pair) $300,000
Variable cost ($25 per pair) ƒ125,000
Contribution margin 175,000
Fixed cost ƒ100,000
Operating income $ƒ75,000
Brown 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. Replace a portion of its variable labor with an automated machining process. This would result in a Required
20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same.
2. Spend $30,000 on a new advertising campaign, which would increase sales by 20%.
3. Increase both selling price by $10 per unit and variable costs by $7 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 10%.
4. Add a second manufacturing facility which would double Brown’s fixed costs, but would increase
sales by 60%.
Evaluate each of the alternatives considered by Brown Shoes. Do any of the options meet or exceed
Brown’s targeted increase in income of 25%? What should Brown do
Answers
Answer:
Solution: Current Position Alternative 1 (increase in fixed cost by 15%, decrease in variable cost by 20%) Alternative 2 (increase in sales and variable cost by 20%, fixed cost increases by $30000) Alternative 3 (Selling price and variable cost increases by $10 and $7, with a 10% reduction in demand) Alternative 4 (increase in sales and variable cost by 60%, with double increase in fixed cost) Sales Revenue ( $60 per pair) $ 300,000.00 $ 300,000.00 $ 360,000.00 $ 315,000.00 $ 480,000.00 Less: Variable Cost ($25 per pair) $ 125,000.00 $ 100,000.00 $ 150,000.00 $ 144,000.00 $ 200,000.00 Contribution Margin $ 175,000.00 $ 200,000.00 $ 210,000.00 $ 171,000.00 $ 280,000.00 Less: Fixed Cost $ 100,000.00 $ 115,000.00 $ 145,000.00 $ 100,000.00 $ 200,000.00 Operating...
Explanation: