Question

Rooney 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 0il Skin Cream 128,000 Color Gel 88,000 14 Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable costs (a c) Contribution margin Fixed costs 208,000 $1,152,000 $1,456,000 256,000) (832,000) 896,000 693,000 $ 203,000 624,000 495,000 $ 129,000 $1,232,000 792,000 440,000 140,000 $ 300,000 Net income 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. Which product has the highest operating leverage? e. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? f. 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.

Answer 1

Answer:

Answer to Part A
Particulars	Skin Cream	Bath Oil	Color Gel
Budgeted Sales in Units (A)	1,28,000	2,08,000	88,000
Expected Sales Price (B)	9	7	14
Variable Cost (C )	2	4	9
Total Sales ( A x B)	11,52,000	14,56,000	12,32,000
Total Variable Cost ( A x C)	2,56,000	8,32,000	7,92,000
Total Contribution (E = Total Sale -total Variable cost)	8,96,000	6,24,000	4,40,000
Less: Fixed Cost	6,93,000	4,95,000	1,40,000
Net Income	2,03,000	1,29,000	3,00,000
Contribution Ratio = Contribution/Sales	0.78	0.43	0.36
Break Even Point In $ = Fixed Cost/ Contribution Ratio	8,91,000	11,55,000	3,92,000
Margin of Safety = Total Sales - Break Even Sales	2,61,000	3,01,000	8,40,000
Margin of Safety in % of Total Sales	0.23	0.21	0.68

Answer to Part B
Particulars	Skin Cream	Bath Oil	Color Gel
Original Budgeted Sales in Units (A)	1,28,000	2,08,000	88,000
Revised Units After increase of 20% (B)	1,53,600	2,49,600	1,05,600
Expected Sales Price (C)	9	7	14
Variable Cost (D )	2	4	9
Total Sales ( B x C)	13,82,400	17,47,200	14,78,400
Total Variable Cost ( Bx D)	3,07,200	9,98,400	9,50,400
Total Contribution = Total Sales - Total Variable Cost	10,75,200	7,48,800	5,28,000
Less: Fixed Cost	6,93,000	4,95,000	1,40,000
Net Income	3,82,200	2,53,800	3,88,000

C-1 Percentage change in net income is as calculated below:
	Skin Cream	Bath Oil	Color Gel
Net Income (before 20% change)	2,03,000	1,29,000	3,00,000
Net Income (after 20% change)	3,82,200	2,53,800	3,88,000
	1,79,200	1,24,800	88,000
Percentage Change	88%	97%	29%

C-2
A)Which product has the highest operating leverage?
operating leverage=Contribution/operating income
Skin Cream	4.41
Bath Oil	4.84
Color Gel	1.47
Answer: Bath Oil

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

= Color Gel

C)Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

= Skin Cream