Question: a. Skin Cream Bath Oil Color Gel Sales price Variable costs Contributi

Question

Question:

a. Skin Cream Bath Oil Color Gel Sales price Variable costs Contribution margin Fixed costs Break-even units Break-even sales in $ Budgeted sales in units Budgeted sales in $ Margin of safety b. Skin Cream Bath Oil Color Gel Expected sales in units Expected sales price Variable costs per unit Income Statements Sales revenue Variable costs Contribution margin Fixed cost Net income c. Skin Cream Bath Oil Color Gel Income before growth Income after growth % Change in income Problem 11-29 Margin of safety and operating leverage Hampton 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 informa- tion and budgeted annual income statements for each of the products follow. Relevant Information Bath Oil 216,000 $2.00 1.006.00 $840,000 $864,000 $720,000 240,000)216,000 (432,000) Skin Cream Color Gel 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 Net income 120,000 $7.00 72,000 10.00 4.00 600,000 648,000 288,000 (480,000)540,000) 120,000 $120,000 $108,000 $168,000 Required a. Determine the margin of safety as a percentage for each product. Round your figures to two deci- mal points geted sales volume. increase in sales. Which product has the highest operating leverage? Round your figures to two b. Prepare revised income statements for each product, assuming a 25 percent increase in the bud- c. For each product, determine the percentage change in net income that results from the 25 percent d. Assuming that management is pessimistic and risk averse, which product should the company add e. Assuming that management is optimistic and risk aggressive, which product should the company decimal points. to its cosmetics line? Explain your answer. add to its cosmetics line? Explain your answer

Explanation / Answer

a.

b.

c.

d. If management is pessimistic and risk averse then they should choose Color Gel in its product line because color gel offers maximum amount of margin of safety (58%) as compared to other products.

e. If management is optimistic and aggressive then they should choose Bath Oil in its product line because Bath Oil shows maximum growth in net income (150%) on certain level of production as compared to other products.

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Skin Cream Bath Oil Color Gel Sales Price $7 $4 $10 Variable Cost $2 $1 $6 Contribution Margin per unit $5 $3 $4 Contribution Margin ratio 0.7143 0.75 0.40 Fixed Cost $480,000 $540,000 $120,000 Break even units 96,000 180,000 30,000 Break even sales $672,000 $720,000 $300,000 Budgeted sales in units 120,000 216,000 72,000 Budgeted sales in $ $840,000 $864,000 $720,000 Margin of Safety $168,000 $144,000 $420,000 Margin of Safety % 20% 17% 58%

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