Gibson 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 116,000 196,000 76,000 7 $ 6 $ 12 2 3 $ 8 Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a * b) Variable costs (a * c) Contribution margin Fixed costs Net income $ 812,000 (232,000) 580,000 (405,000) $ 175,000 $1,176,000 (588,000) 588,000 (405,000) $ 183,000 $ 912,000 (608,000) 304,000 (88,000) $ 216,000 Required: a. Determine the margin of safety as a percentage for each product. b. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume. c1. For each product, determine the percentage change in net income that results from the 20 percent increase in sales. c2. Which product has the highest operating leverage? d. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? e. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? Complete this question by entering your answers in the tabs below. Req A Req B Reg C1 Req C2 to E Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage values.) Skin Cream Bath Oil Color Gel Margin of safety % Complete this question by entering your answers in the tabs below. Req A ReqB Req ci Req c2 to E Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume. GIBSON COMPANY Income Statements Skin Cream Bath Oil Color Gel Sales revenue Variable costs Contribution margin Fixed cost Net income Complete this question by entering your answers in the tabs below. Req A ReqB Reg C1 Req c2 to E For each product, determine the percentage change in net income that results from the 20 percent increase in sales. (Round your answers to whole percentage values.) Bath Oil Skin Cream % Color Gel % Percentage change in net income % Complete this question by entering your answers in the tabs below. Req A ReqB Req c1 Req C2 to E c2. Which product has the highest operating leverage? d. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? e. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? c2. Which product has the highest operating leverage? d. 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? e
