Question

Problem 11-29 Margin of safety and operating leverage LO 11-6 Vernon 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 Skin Cream 135.ee Relevant Taformation b ath Cole 216,000 Budgeted sales in units (a) Expected sales price (1) Variable costs per unit (c) Income statements Sales revenue (axb) Variable costs ( a c ) Contribution wargin Fixed costs $1,512, $1,440,000 (960,000) $1,224, ose (272,00) 952,00 72.00) $ 175.000 848,000 (555,00) 3. (160,000) 20.ee 5 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 A ReqB ReqC Reg D to E Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage value Skin Cream Bath O Color Gel Margin of safety GA RegB>

Answer 1

	Skin Cream	Bath Oil	Color Gel
Sales Revenue	1,224,000	1,512,000	1,440,000
Variable costs	(272,000)	(864,000)	(960,000)
Contribution Margin	952,000	648,000	480,000
Fixed costs	(777,000)	(555,000)	(160,000)
Net Income	175,000	93,000	320,000
CM Ratio = CM/Sales	0.777777778	0.428571429	0.333333333
Break even sales = Fixed costs/CM Ratio	999,000	1,295,000	480,000
a.Margin of Safety % = (Sales - Break even sales)/Sales	18.38%	14.35%	66.67%
Income Statement
	Skin Cream	Bath Oil	Color Gel
Sales Revenue	1,468,800	1,814,400	1,728,000
Variable costs	(326,400)	(1,036,800)	(1,152,000)
Contribution Margin	1,142,400	777,600	576,000
Fixed costs	(777,000)	(555,000)	(160,000)
Net Income	365,400	222,600	416,000
c.% change in Net Income	108.80%	139.35%	30.00%
d.The product with lowest break even point i.e. Color Gel
e.The product with highest Degree of operating leverage i.e. Bath Oil