| | #2 | Carmon 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 | | Budgeted sales in units (a) | | 112,000 | | | 192,000 | | | 72,000 | | | Expected sales price (b) | $ | 9 | | $ | 5 | | $ | 12 | | | Variable costs per unit (c) | $ | 2 | | $ | 2 | | $ | 7 | | | Income statements | | | | | | | | | | | Sales revenue (a b) | $ | 1,008,000 | | $ | 960,000 | | $ | 864,000 | | | Variable costs (a c) | | (224,000 | ) | | (384,000 | ) | | (504,000 | ) | | | | | | | | | | | | | Contribution margin | | 784,000 | | | 576,000 | | | 360,000 | | | Fixed costs | | (525,000 | ) | | (375,000 | ) | | (100,000 | ) | | | | | | | | | | | | | Net income | $ | 259,000 | | $ | 201,000 | | $ | 260,000 | | | | | | | | | | | | | | | | a. | Determine the margin of safety as a percentage for each product. (Round your answers to nearest whole percent.) | | | | | | | | b. | Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume. | | | | | | | | c-1. | For each product, determine the percentage change in net income that results from the 20 percent increase in sales. (Round your answers to nearest whole percent.) | | c-2. | Which product has the highest operating leverage? | | | | | | | | Skin Cream | | | Bath Oil | | | Color Gel | | | d. | Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? | | | | | | | | Skin Cream | | | Bath Oil | | | Color Gel | | | e. | Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? | | | | | | | | Skin Cream | | | Bath Oil | | | Color Gel | | |
| | | #3 Yilan Company is considering adding a new product. The cost accountant has provided the following data. | | | | | | | Expected variable cost of manufacturing | $ | 50 | per unit | | Expected annual fixed manufacturing costs | $ | 92,000 | | | | | The administrative vice president has provided the following estimates. | | | | | | | Expected sales commission | $ | 4 | per unit | | Expected annual fixed administrative costs | $ | 48,000 | | | | | The manager has decided that any new product must at least break even in the first year. | | Required: | | Use the equation method and consider each requirement separately. | | a. | If the sales price is set at $74, how many units must Yilan sell to break even? | | | | | | | | b. | Yilan estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even? | | | | | | | | c. | Yilan has decided to advertise the product heavily and has set the sales price at $78. If sales are 8,000 units, how much can the company spend on advertising and still break even? | | | | | | | |
