Reference no: EM132653546

Question - Rollie's Recreational Feet manufactures three types of footwear: hiking boots, cross-trainers, and sandals. The planning team is working through market research material for the upcoming season to assist in determining profitability for the coming year. The marketing manager reports that they sell twice the amount of hiking boots as cross-trainers, and twice as many sandals as hiking boots. The controller has worked with the production and sales managers and purchasing to determine the following revenues and variable costs:

	Hiking Boots	Cross-Trainers	Sandals
Selling price per pair	$150	$66	$30
Variable manufacturing costs	50	18	11
Variable selling & admin costs	15	12	8

Annual fixed costs are $400,000.

Required -

a) How many pairs of each type of footwear have to be sold to achieve a before-tax operating income of $150,000? Be sure to incorporate the expected sales mix in your calculations.

b) The controller wants to ensure that the risk levels are within reason. As such she wants to know the minimum number of pairs of each type of footwear to sell to maintain a margin of safety of 20%. What will be the operating income at this level?

c) The marketing manager would like to increase the ratio of hiking boot sales in the product sales mix because the contribution margin is higher. He feels that if the selling price per pair were reduced to $120 and the company launched an advertising campaign at an annual fixed cost of $38,000, the sales mix of hiking boots to cross-trainers would rise to three to one. The sandals to cross-trainers sales mix would remain at four to one. If these changes are made and the sales mix changed as projected, how many pairs of each type of footwear have to be sold to achieve a before-tax operating income of $150,000?

d) Should Rollie's Recreational Feet reduce the price of its hiking boots and implement the advertising campaign? Explain.