Question

Zachary 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 01:17:09 Relevant Information Skin Cream Bath oil Color Gel 140,000 220,000 100,000 $ 7 $ 7 $ 15 $ 2 $ 4 $ 11 Budgeted sales in units (a) Expected sales price (6) Variable costs per unit (c) Income statements Sales revenue (axb) Variable costs ( ac) Contribution margin Fixed costs Net Income $ 980,000 (280.000 700,000 (585.000 $ 115,000 $1,540,000 (880,000) 660,000 (585.600) 5 75,000 $1,500,000 (1,100,000) 400,000 (136,000) 5 264,000 Required o. 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?

Answer 1

Requirement A: The margin of safety: Budgeted sales exceeds the break-even sales Formula: The margin of Safety=Budgeted sales (or Actual)-Break even sales Break Even point in units) = Fixed cost/Contribution per unit а Particulars Budgeted sales in units expected sales price Variable costs per unit Skin Cream Bath oil 140000 $ 7 $ $ 2 $ Color Gel 220000 100000 7 $ 4 $ 11 b 15 с d e f h i j k 1 Revenues (Sales) (a*b) Less:Variable Costs (a*c) Contribution Less:Fixed Cost Net Income Contribution per unit (f/a) Break Even Point ( in Units) (g/i) Break Even Point ( in Sales) (*B) Margin of safety (in Sales) (d-k) $ 980,000 (280,000) 700,000 (585,000) 115,000 5 117,000 819,000 161,000 $ 1540,000 (880,000) 660,000 (585,000) 75,000 3 195,000 13,65,000 175,000 $ 1500,000 (1100,000) 400,000 (136,000 2,64,000 4 34,000 5,10,000 990,000 Req A Margin of safety [(1/d)*100] Skin Cream Bath oil 16.42% Color Gel 11.36% 66%

Requirement B: а b с d Budgeted sales in units expected sales price Variable costs per unit Sales Revenue (a*b) Less:Variable Costs (a*c) Contribution Margin Less:Fixed Cost Net Income Skin Cream Bath oil Color Gel 168000 264000 120000 $ 7 $ 7 $ 15 $ 2 $ 4 $ 11 $ 1176,000 $ 1,848,000 $ 1,800,000 (336,000) (1,056,000) (1,320,000) 840,000 792,000 480,000 (585,000) (585,000) (136,000) 255,000 207,000 344,000 e f g h Requirement C: Rec change in Net income % of change in Net income Skin Cream 140,000 121.74% Bath oil 132,000 Color Gel -80,000 176% -30.3% Requirement D: As if management is pessimistic and risk-averse it is better to add Color gel as their margin of safety is 66% Requirement E: As if management is Optimistic and risk aggressive it is better to add Skin cream as their % of Change in income is more when compared to Color Gel and Bath oil

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