Geary Company produces custom machinery that has few competitors. As such, Geary is able to charge a large markup that is reflected in its large gross profit percentage. Recently the marketing director proposed offering a new set of products that are more generic in nature, and therefore will not allow large markups. The accounting department has, however, determined the products will add to Geary's overall net income. The following table provides estimates of Geary's profitability both with and without the new product:

Required The President of Geary, Jack Brown, has asked you to write a memo answering the following questions.

a. How will the new product line affect the company's profitability as measured by its gross profit percentage and the return on sales ratio?

b. How is it possible for net income to improve, while at the same time these profitability ratios may deteriorate?

c. Should the company expand by offering this new product line?

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Net sales... Cost of goods sold Net income.... Without New With New Product Product $250,000 $350,000 125,000 210,000 25,000 31,500