Toby's Shoe Company has one type of shoe in its shoe product line which is a running shoe. The detail on the production of this running shoe line:

Sales Price 40.00

Variable cost of goods sold 13.80

Variable selling expenses 10.60

Variable administrative expenses 13.00

Annual Fixed Costs:

Overhead 7,800,000

Selling Expenses 1,550,000

Administrative Expenses 3,400,000

Toby's Shoe Company is considering expanding the shoe product line by introducing a hiking shoe along with continuing to produce the running shoe. The hiking shoe is expected to sell for $90; costs of goods sold is expected to be $36.00 per pair.

If Toby's introduces the hiking shoe, the company will incur an additional $300,000 per year in advertising costs. Toby's marketing manager has estimated that one pair of hiking shoes would be sold for every four pair of running shoes.

A. If managers decide to introduce the hiking shoes, how many units (pairs) of each type of shoes would be required to break even in the coming year?

B. After additional research, Toby's marketing manager believes that if the price of the new hiking shoes drops to $66, it will be more attractive to potential customers. She also believes that at that price, the additional advertising cost could be cut to $177,600. These changes would result in sales of three pair of hiking shoes for every one pair of running shoes. Based on these circumstances, how many units of each type of shoes would be required to break even in the coming year?

C. What additional factors should the managers of Toby's consider before deciding to introduce the new hiking shoes? Would you recommend adding the new type of shoe on to the product line? Why, or why not?