Question

Jordan 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 Skin Cream Bath Oil Color Gel 120,000 200,000 80,000 9 $ 6 $ 13 2. 3 $ 8 to ta AtA Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable costs (a x c) Contribution margin Fixed costs Net income $1,080,000 (240,000) 840,000 (609,000) $ 231,000 $1,200,000 (600,000) 600,000 (435,000) $ 165,000 $1,040,000 (640,000) 400,000 (120,000) $ 280,000 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. c1. For each product, determine the percentage change in net income that results from the 20 percent increase in sales. c2. Which product has the highest operating leverage? 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?

Answer 1

Skim Cream Bath Oil Color Gel 120000 200000 80000 13 31 Budgeted Sales Expected sales Price Variable Cost per unit Income Statement Sales Revenue Variable Expense Contribution Margin Fixed Cost Net income 1080000 240000 840000 689000 1510001 1200000 600000 600000 435000 165000 1040000 640000 400000 120000 280000 a) Determine the Margin of Safety as a percentage for Each Product Skim Cream Bath Oil Color Gel CM Ratio 77.78% 50.00% 38.46% (Contribution margin/sales) BEP Sales 885857.1429 870000 312000 (Fixed Cost / CM ratio) Margin of Safety 194142.8571 330000 728000 Actual sales - BEP sale) Margin of Safety % 17.98% 27.50% 70.00% (Margin of Safety / Actual Sales) a Determine the Margin of Safety as a percentage for Each Product Skim Cream Bath Oil Color Gel Margin of Safety % 17.98% 27.50% 70.00% Ir Margin of Safety / Actual Sales

13) 8 B). Revised income Statement for each product if 20% increase in budgeted Skim Cream Bath Oil Color Gel Budgeted Sales (20% Increase) 144000 240000 96000 Expected sales Price Variable Cost per unit Revised Income Statement Income Statement Skim Cream Bath Oil Color Gel Sales Revenue 1296000 1440000 1248000 LESS:Variable Expense 288000 7200001768000 Contribution Margin 1008000 720000 480000 LESS: Fixed Cost 689000 435000 120000 Net income 319000 285000 360000 C-1] C. Percentage change in net income with the percentage 20% change in Sales Change in net income 168000 120000 80000 Skim Cream Bath Oil Color Gel Percentage change in net income 111.26% 72.73% 28.57% Operating levlerage 3.16 2.53 1.33 C-2 Which Prodcut has the Highest oeprating leverage Skim Cream Assume that the Management is Pessimistic and risk averse, Which Color Gel D product should the company add: Assume that the Management is Optimistic and risk Aggressive, E Which product should the company add: Skim Cream