Question
The Chelsea Shoe Company produces its famous shoe, the Divine Loafer that sells for $45 per pair. Operating income for 2012 is as follows: Sales
The Chelsea Shoe Company produces its famous shoe, the Divine Loafer that sells for $45 per pair. Operating income for 2012 is as follows:
Sales revenue ($45 per pair) $270,000
Variable cost ($25 per pair) 150,000
Contribution margin 120,000
Fixed cost 72,000
Operating income $48,000
Chelsea Shoe Company would like to increase its profitability over the next year by at least 25%. To doso, 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 20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same. |
2. | Spend $10,000 on a new advertisingcampaign, which would increase sales by 10%. |
3. | Increase both selling price by $10 per unit and variable costs by $6 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 15%. |
4. | Add a second manufacturingfacility, which would double Chelsea's fixed costs but would increase sales by 40%. |
Required
Evaluate each of the alternatives considered by Chelsea Shoes. Do any of the options meet or exceed Chelseas targeted increase in income of 25%? What should Chelsea do?
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