Question

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. Reg A Reg B ReqC Reg D to E Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage values.) Skin Cream Bath Oil Color Gel Margin of safety

Answer 1

Solution:

Here the computation is done by mentioning each line item as i, ii, iii and so on. Alternatively, one can use a, b, c , d etc..

Part A.

	Skin Cream	Bath Oil	Color Gel
Sales price (i)	$9.00	$7.00	$14.00
Variable costs (ii)	$2.00	$4.00	$9.00
Contribution margin (iii) = (i – ii)	$7.00	$3.00	$5.00
Fixed costs (iv)	$693,000	$495,000	$140,000
Break-even units (v) = (iv ÷ iii)	99,000	1,65,000	28,000
Break-even sales in $ (vi) = (v x i)	$891,000	$1,155,000	$392,000
Budgeted sales in units (vii)	1,28,000	2,08,000	88,000
Budgeted sales in $ (viii) = (vii x i)	$1,152,000	$1,456,000	$1,232,000
Margin of safety (viii – vii) ÷ viii	22.66%	20.67%	68.18%

Part B.

	Skin Cream	Bath Oil	Color Gel
Sales Expeced in units (i)	1,53,600	2,49,600	1,05,600
Expected sales price (ii)	$9.00	$7.00	$14.00
Variable costs per unit (iii)	$2.00	$4.00	$9.00
Income Statements
Sales revenue (iv) = (i x ii)	$1,382,400	$1,747,200	$1,478,400
Variable costs (v) = (i x iii)	$307,200	$998,400	$950,400
Contribution margin (vi)= (iv-v)	$1,075,200	$748,800	$528,000
Fixed cost (vii)	$693,000	$495,000	$140,000
Net income (viii) = (vi-vii)	$382,200	$253,800	$388,000

Part C.

	Skin Cream	Bath Oil	Color Gel
Income before change (i)	$ 203,000	$129,000	$300,000
Income after change (ii)	$382,200	$253,800	$388,000
% change in income (ii – i) ÷ i	88.28%	96.74%	29.33%

Part D.

In this scenario, the management would choose Color Gel as the margin of safety is high compared to the other products.

Part E.

In this scenario, the management is likely to choose Bath Oil as the the margin of safety is low compared to Color Gel and Skin Cream.