Ivan Co. (Ivan) currently produces a single product, OP. Budgeted operating information for expected sales of 40,000 units is as follows:

Sales

$2,000,000

Cost of goods sold

Variable manufacturing costs

$ 300,000

Fixed manufacturing costs

600,000

$ 900,000

Gross profits

$1,100,000

Selling and administrative expenses

Sales commission (9% of selling price)

$ 180,000

Fixed advertising expenses

266,000

Fixed administrative expenses

350,000

$ 796,000

Operating income before taxes

$ 304,000

Income tax (40%)

121,600

Net income

$ 182,400

Fixed manufacturing costs are allocated at a rate of $2.50 per machine hour. Ivan's management is considering the introduction of a new product, NZ, to diversify its product lines and use up all available machine hour capacity. Ivan estimates the following sales and costs related to NZ:

Expected sales

10,000 units

Selling price per unit

$20

Variable manufacturing cost per unit

$9

Fixed manufacturing cost (allocated) per unit

$5

Sales commission per unit (15% of selling price)

$3

Incremental fixed advertising expenses

$32,000

Incremental fixed administrative expenses

$16,000

Required:

a) Assume that Ivan produces OP only. Calculate Ivan's margin of safety.

b) Assume that Ivan starts producing NZ, and that the estimates above occur as expected. Calculate Ivan's new margin of safety.

c) Calculate the impact to Ivan's operating income before taxes if both OP and NZ are produced, and discuss whether Ivan should diversify its product line.