Question

The Nubuck Shoe Company produces its famous shoe, the Divine Loafer that sells for $50 per pair. Operating income for Nubuck Shoe Company would like to increase its profitability over the next year by at least 25%. To do so, the company 2017 is as follows: is considering the following options: (Click the icon to view the income statement.) (Click the icon to view the options.) Read the requirement. Evaluate each of the alternatives considered by Nubuck Shoes. (Use parentheses or a minus sign for an operating loss.) Alternative Alternative Alternative Alternative 2 Sales revenue Variable cost Contribution margin Fixed cost Operating income (loss) Do any of the options meet or exceed Nubuck's targeted increase in income of 25%? (Round your answers to the nearest whole percent. Use parentheses or a minus sign for a negative percentage change.) Percent change in operating income Alternative Meet or Exceed? = N

Answer 1

Present structure:

No of units sold = $ 150,000/ $50 p.u. = 3000 unit

1.

	1	2	3	4
Sales revenue (A)	(No changes) 150,000	50$ * 3000* 1.3 = 195000	(50+15)*(3000*80%) = 156000	$ 50*(3000*150/100) = 225000
Variable Cost (B)	3000*(20*85%) = 51,000	20$ * 3000*1.3 = 78000	(20+8)*(3000*80%) = 67200	$ 20*(3000*150/100) = 90000
Contribution (C = A-B)	99,000	117000	88800	135000
Fixed Costs (D)	36000*110/100 = 39,600	36000+20000 = 56000	(no changes) 36000	36000*2 = 72000
Operating Income (C - D)	59,400	61000	52800	63000

2.

Operating Income (from above)	59400	61000	52800	63000
Existing profit (E)	54000	54000	54000	54000
Difference (F)	5400	7000	-1200	9000
Percentage of profit (E/F)*100	10.00%	12.96%	-2.22%	16.67%
Met/exceeded?	NO	NO	NO	NO

Evaluation:

None of the alternatives meet criteria of 25% increase in profits. The best one is Alternative 4 yields 16.67%.

Hence, Nubuck should look into using combination of two alternatives: It can combine Alternative 4 ie., adding second manufacturing facility and also Alternative 2 ie spending on advertisement or Alternative 4 along with alternative 1 ie reducing variable costs p.u. these can increase profit by 25%.

Please comment in case of any query regarding the solution.