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

Required:

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