Finch 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.

1. Determine the margin of safety as a percentage for each product.

2. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.

3. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

4. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?

5. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

Transcribed image text: ncicvarL IILULlallUI Skin Cream 112,000 Bath Oil 192,000 $ 5 $ 2 Color Gel 72,000 $ 12 $ 7 2 Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a * b) Variable costs (a X c) Contribution margin Fixed costs Net income $1,008,000 (224,000) 784,000 (525,000) $ 259,000 $ 960,000 (384,000) 576,000 (375,000) $ 201,000 $ 864,000 (504,000) 360,000 (100,000) $ 260,000 Skin Cream Bath Oil Color Gel Margin of safety FINCH COMPANY Income Statements Skin Cream Bath Oil Color Gel Sales revenue Variable costs Contribution margin Fixed cost Net income Skin Cream Bath Oil Color Gel Percentage change in net income Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line