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

Budgeted sales in units $($a$)116,000196,00076,000$

Expected sales price $($b$)$ $$7$ $$6$ $$12$

Variable costs per unit $($c$)$ $$2$ $$3$ $$8$

Income statements

Sales revenue $($a $\backslash$times b$)$ $$812,000$ $$1,176,000$ $$912,000$

Variable costs $($a $\backslash$times c$)(232,000)(588,000)(608,000)$

Contribution margin $580,000588,000304,000$

Fixed costs $(405,000)(405,000)(88,000)$

Net income $$175,000$ $$183,000$ $$216,000$

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.

c$1.$ For each product, determine the percentage change in net income that results from the $20$ percent increase in sales.

c$2.$ 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?