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home / study / business / accounting / accounting questions and answers / the mersey shoe company produces its famous? shoe, the divine loafer that sells for ?$55 ... Question: The Mersey Shoe Company produces its famous? shoe, the Divine Loafer that sells for ?$55 per pair... The Mersey Shoe Company produces its famous? shoe, the Divine Loafer that sells for ?$55 per pair. Operating income for 2017 is as? follows: Sales revenue ($55 per pair) $220,000 Variable cost ($20 per pair) 80,000 Contribution margin 140,000 Fixed cost 70,000 Operating income $70,000 Mersey 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: 1. Replace a portion of its variable labor with an automated machining process. This would result in a 25?% decrease in variable cost per? unit, but a 10?% increase in fixed costs. Sales would remain the same. 2. Spend $35,000 a new advertising? campaign, which would increase sales by 40?%. 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 approximately15?%. 4. Add a second manufacturing facility that would double Mersey?'s fixed? costs, but would increase sales by 60?%. Evaluate each of the alternatives considered by MerseyMersey Shoes. ?(Use parentheses or a minus sign for an operating? loss.) Alternative 1 Sales revenue Variable cost Contribution margin Fixed cost Operating income (loss) Alternative 2 Alternative 3 Alternative 4 Do any of the options meet or exceed MerseyMersey?'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 Alternative operating income Meet or Exceed? 1 % 2 % 3 % 4 % What should MerseyMersey ?do? ? Alternative 1 Alternative 4 Alternative 2 Alternative 3 has the highest operating income. ? This alternative also meets or exceeds However, this alternative does not meet or exceed the targeted increase in income of? 25% ? and should be chosen by Mersey. and, therefore, should only be chosen by Mersey if they are okay with not meeting the target percent. Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

	Current Level	Alternative 1	Alternative 2	Alternative 3	Alternative 4
SP per pair	55.00	55.00	55.00	65.00	55.00
Sales of number of Shoe Pairs	4,000.00	4,000.00	5,600.00	3,400.00	6,400.00
Sales Revenue	220,000.00	220,000.00	308,000.00	221,000.00	352,000.00
Variable Costs	80,000.00	60,000.00	112,000.00	95,200.00	128,000.00
Contribution Margin	140,000.00	160,000.00	196,000.00	125,800.00	224,000.00
Fixed Cost	70,000.00	77,000.00	105,000.00	70,000.00	140,000.00
Operating Income	70,000.00	83,000.00	91,000.00	55,800.00	84,000.00
Change In Operating Income		13,000.00	21,000.00	(14,200.00)	14,000.00
Change In Operating Income - %		18.57%	30.00%	-20.29%	20.00%
Alternative 1.
Variable Cost = $80,000 X 75% = $60,000
Fixed Cost = $70,000 X 110% = $77,000
Alternative 2.
Sales in pairs = 4,000 pairs X 140% = 5,600 pairs
Variable Cost = 5,600 pairs X $20 = $112,000
Fixed Cost = $70,000 + $35,000 (Advt. Exp.) = $1,05,000
Alternative 3.
Sales in pairs = 4,000 pairs X 85% = 3,400 Pairs
Variable Cost = 3,400 Pairs X ($20 + $8) = $95,200
Alternative 4.
Sales in pairs = 4,000 pairs X 160% = 6,400 Pairs
Variable Cost = 6,400 Pairs X $20 = $128,000
Fixed Cost = $70,000 X 2 = $140,000
Alternative 3 yields the highest opearating income and it is more than 25% increase in operating income.