Question
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
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 | ||||||||
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| Skin Cream | Bath Oil | Color Gel | ||||||
Budgeted sales in units (a) |
| 138,000 |
|
| 218,000 |
|
| 98,000 |
|
Expected sales price (b) | $ | 10 |
| $ | 9 |
| $ | 16 |
|
Variable costs per unit (c) | $ | 2 |
| $ | 4 |
| $ | 10 |
|
Income statements |
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Sales revenue (a b) | $ | 1,380,000 |
| $ | 1,962,000 |
| $ | 1,568,000 |
|
Variable costs (a c) |
| (276,000 | ) |
| (872,000 | ) |
| (980,000 | ) |
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Contribution margin |
| 1,104,000 |
|
| 1,090,000 |
|
| 588,000 |
|
Fixed costs |
| (912,000 | ) |
| (950,000 | ) |
| (198,000 | ) |
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Net income | $ | 192,000 |
| $ | 140,000 |
| $ | 390,000 |
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a. | Determine the margin of safety as a percentage for each product. (Round your answers to nearest whole percent.) |
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| Skin Cream (%) | Bath Oil(%) | Color Gel (%) |
Margin of Safety |
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b) Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
| Skin Cream (%) | Bath Oil(%) | Color Gel (%) |
Percentage change in net income |
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