Problem 11-29 Margin of safety and operating leverage Hampton Company is considering the addition of a new product to its cosmetics line. The con has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant inf tion and budgeted annual income statements for each of the products follow. Relevant Information Color Gel Skin Cream 120,000 7.00 Bath Oil 216,000 1.00 72,000 $ 4.00 10.00 6.00 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 2.00 $840,000 $864,000$%720,000 (216,000) (432,000 288,000 (540,000)(120,000) 240,000) 600,000 (480,000) 548,000 $20.000 10.0 $168.000 Required a. Determine the margin of safety as a percentage b. Prepare revised income statements for each product, assuming a 25 percent increase in the bud- c. For each produc hi-wand your figures to two dec- mal points. geted sales volume t, determine the percentage change in net income that results from the 25 percent increase in sales. Which product has the highest operating leverage? Round your figures to two decimal points. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? Explain your answer. d. e. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? Explain your answer. MMUNICATE ATC 11-1 Business Applications Operating leverage: Description of business for Caterpillar, Inc With 2014 sales and revenues of $55. 184 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel- electric locomotives. The company principally operates through its three product segments-Resour