Jerome Company has three distinctly different options available as it considers adding a new product to its automotive division: engine oil, coolant, or windshield washer. Relevant information and budgeted annual income statements for each product follow:

Required
a. Determine the margin of safety as a percentage for each product.
b. Prepare revised income statements for each product, assuming 20 percent growth 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. Which product has the highest operating leverage? Round computation to the nearest whole percent.
d. Assuming that management is pessimistic and risk averse, which product should the company add? Explain your answer.
e. Assuming that management is optimistic and risk aggressive, which product should the company add? Explain your answer.

Transcribed Image Text:

Relevant Information Windshleld Washer Engine Oll Coolant Budgeted sales in units (a) Expected sales price (b) Variable costs per unit () 25,000 $2.40 $1.00 40,000 $2.85 $1.25 200,000 $1.15 $0.35 Income Statements 60,000 $114,000 $230,000 Sales revenue (a x b) Variable costs (ax c) Contribution margin Fixed costs Net income (25,000) (50,000 70,000) 160,000 35,000 (24,500)32 64,000 10,500 32,000 $10,500 32000 $100,000