Question
Baird Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a
Baird 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) | 104,000 | 184,000 | 64,000 | |||||||||
Expected sales price (b) | $ | 9 | $ | 4 | $ | 11 | ||||||
Variable costs per unit (c) | $ | 2 | $ | 1 | $ | 6 | ||||||
Income statements | ||||||||||||
Sales revenue (a b) | $ | 936,000 | $ | 736,000 | $ | 704,000 | ||||||
Variable costs (a c) | (208,000 | ) | (184,000 | ) | (384,000 | ) | ||||||
Contribution margin | 728,000 | 552,000 | 320,000 | |||||||||
Fixed costs | (441,000 | ) | (315,000 | ) | (80,000 | ) | ||||||
Net income | $ | 287,000 | $ | 237,000 | $ | 240,000 | ||||||
Required:
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Determine the margin of safety as a percentage for each product.
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Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
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For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
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Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?
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Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?
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