Question

Finch 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.

ncicvarL IILULlallUI Skin Cream 112,000 Bath Oil 192,000 $ 5 $ 2 Color Gel 72,000 $ 12 $ 7 2 Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a * b) Variable costs (a X c) Contribution margin Fixed costs Net income $1,008,000 (224,000) 784,000 (525,000) $ 259,000 $ 960,000 (384,000) 576,000 (375,000) $ 201,000 $ 864,000 (504,000) 360,000 (100,000) $ 260,000

1. Determine the margin of safety as a percentage for each product.

2. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.

3. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

4. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?

5. 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 Budgeted Sales Expected sales Price Variable Cost per unit Income Statement Sales Revenue Variable Expense Contribution Margin Fixed Cost Net income 192000 112000 72000 12 1008000 960000 864000 224000 504000 384000 576000 784000 360000 525000 375000 100000 259000 201000 260000 1. Determine the Margin of Safety as a percentage for Each Product Skim Cream Bath Oil Color Gel CM Ratio 77.78% 60.00% 41.67% (Contribution margin/sales ) BEP Sales (Fixed Cost / CM ratio ) Margin of Safety (Actual sales - BEP sale) Margin of Safety % (Margin of Safety / Actual Sales ) 675000 625000 240000 335000 333000 624000 34.90% 72.22% 33.04% 1. Determine the Margin of Safety as a percentage for Each Product Skim Cream Bath Oil Color Gel Margin of Safety % Margin of Safety / Actual Sales ) 33.04% 34.90% 72.22%

2. Revised income Statement for each product if 20% increase in budgeted Skim Cream Bath Oil Color Gel Budgeted Sales (20% Increase) Expected sales Price Variable Cost per unit 134400 230400 86400 5 12 Revised Income Statement Income Statement Skim Cream Bath Oil Color Gel Sales Revenue LESS:Variable Expense Contribution Margin LESS: Fixed Cost Net income 1152000 1036800 1209600 268800 460800 604800 940800 691200 432000 525000 375000 100000 415800 316200 332000 3. Percentage change in net income with the percentage 20% change in Sales Cahnge in net income 156800 115200 72000 Skim Cream Bath Oil 57.31% Color Gel Percentage change in net income 60.54% 27.69% Assume that the Management is Pessimistic and risk averse, Which product should the company add: Assume that the Management is Optimistic and risk Aggressive, Which product should the company add: Color Gel Skim Cream