Question

Problem 11-29 Margin of safety and operating leverage LO 11-6 Stuart Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow Relevant Information Bath Oil Skin Cream Budgeted sales in 132,000 units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a Color Gel 92,000 14 10 212,000 $ 924,000 $1,484,000 $1,288,000 Variable costs (a Contribution margin Fixed costs Net income 368,000 (120,000 $ 135,000 111,000 248,000 (264,000) (848,000 (920,000) 636,000 525,000 660,000 525,000 Required: a. Determine the margin of safety as a percentage for each product. b. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume c. For each product, determine the percentage change in net income that results from the 20 percent increase in sales d. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? e. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? Complete this question by entering your answers in the tabs below. Req D to Req A Req B Req C For each product, determine the percentage change in net income that results from the 20 percent increase in sales. (Round your answers to whole percentage values. Skin Cream Bath Oi Color Gel Percentage change in net income < Req B Req D to E >

Answer 1

I've provided the solution for requirement C as you have specifically highlighted it in the question for full solution please comment...

Answer for requirement C:

Operating leverage =Contribution margin ÷ Earnings Before Interest and Tax (EBIT)

OR

Operating leverage =% Change in EBIT ÷ %Change in Sales

From the above formula :

% Change in EBIT* =Operating leverage x % Change in Sales

* In the given question, it is assumed EBIT = Net income.

Particulars	Skin Cream	Bath Oil	Color gel
A. Contribution margin	660000	636000	368000
B. Net income (EBIT)	135000	111000	248000
C. Operating leverage =A÷B	4.8889	5.7297	1.4839
D. %Change(increase) in Sales	20	20	20
E. %Change(increase) in Net income =D×C	98%	115%	30%

IN CASE OF ANY DOUBTS OR CORRECTIONS FEEL FREE TO COMMENT BELOW  

PLEASE RATE MY ANSWER BY HITTING ??

THANK YOU