The Derby Shoe Company produces its famous shoe, the Divine Loafer that sells for $ 70 per pair. Operating income for 2013 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:

Required

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 $ 25,000 on a new advertising campaign, which would increase sales by 10%.

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%.

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?