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) 125,000
Contribution margin 175,000
Fixed cost 100,000
Operating income $ 75,000
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:
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 $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?