Question

Solomon 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 Skin Cream Bath Oil Color Gel 130,000 210,000 90,000 10 $ 15 $ 2 4 $ 9 $ 10 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 $1,300,000 (260,000) 1,040,000 (816,000)_ $ 224,000 $1,890,000 (840,000) 1,050,000 (850,000) $ 200,000 $1,350,000 (810,000) 540,000 (174,000) $ 366,000 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 Req 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

Requirement 1 Skin Cream 1,30,000 Bath Oil 2,10,000 Color Gel 90,000 8 Current sales Contribution per unit Fixed Cost Breakeven sales Margin of Safety sales Margin of safety % $ 8,16,000.00 1,02,000 28,000 21.538% $ 8,50,000.00 1,70,000 40,000 19.048% $ 1,74,000.00 29,000 61,000 67.778% Margin of Safety % = (Margin of safety sales / Current Sales) * 100 Requirement 2 Sales Revenue Variable Cost Contribution Margin Fixed Cost Net Income Skin Cream $ 15,60,000.00 $ 3,12,000.00 | $ 12,48,000.00 $ 8,16,000.00 | $ 4,32,000.00 Bath Oil Color Gel $ 22,68,000.00 $ 16,20,000.00 $ 10,08,000.00 $ 9,72,000.00 $ 12,60,000.00 $ 6,48,000.00 $ 8,50,000.00 $ 1,74,000.00 $ 4,10,000.00 $ 4,74,000.00 Requirement 3 Skin Cream Bath Oil Color Gel Net Income Budgeted sales Increase sales volume by 20% Percentage Change in Net Income $ 2,24,000.00 $ 2,00,000.00 $ 3,66,000.00 $ 4,32,000.00 $ 4,10,000.00 $ 4,74,000.00 92.857% 105.000% 29.508%

Requirement 4: Color Gel

Explanation: Because it has higher margin of safety as compared to other products

Requirement 5: Bath Oil

Explanation: Because it has the highest % increase in net income as compared to other products

Require A Pilot Fuel Depreciation Direct Direct Indirect Require B Pilot Fuel Depreciation Total Cost Chicago to San Chicago to New Francisco York $ 260.00 $ 210.00 $ 210.00 $ 105.00 $ 900.00 $ $ 1,370.00 $ 595.00 280.00 Rate of depreciation per mile = Cost of Airplane / Estimated useful life in miles = $4,800,000 / 24,000,000 miles = $0.2 per mile

Notes:

1. I have changed the numbering of first question from Alphabets to numbers just to differentiate the answers.
2. Be careful while reading figures (with commas)