Hampton 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 InformationSkin CreamBath OilColor GelBudgeted sales in units (a)120,000216,00072,000Expected sales price (b)$7.00$4.00$10.00Variable costs per unit (c)$2.00$1.00$6.00Income statementsSales revenue (a b)$840,000$864,000$720,000Variable costs (a c)(240,000)(216,000)(432,000)Contribution margin600,000648,000288,000Fixed costs(480,000)(540,000)(120,000)Net income$120,000$108,000$168,000

Required:

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

b. Prepare revised income statements for each product, assuming a 25 percent increase in the budgeted sales volume.

c1. For each product, determine the percentage change in net income that results from the 25 percent increase in sales.

c2. Which product has the highest operating leverage?