Problem 11-29 Margin of safety and operating leverage LO 11-6

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)		116,000				196,000				76,000
Expected sales price (b)	$	7			$	6			$	12
Variable costs per unit (c)	$	2			$	3			$	8
Income statements
Sales revenue (a b)	$	812,000			$	1,176,000			$	912,000
Variable costs (a c)		(232,000	)			(588,000	)			(608,000	)
Contribution margin		580,000				588,000				304,000
Fixed costs		(405,000	)			(405,000	)			(88,000	)
Net income	$	175,000			$	183,000			$	216,000

Required:

1. Determine the margin of safety as a percentage for each product.
2. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
3. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
4. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?
5. 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 C Req A Req B Req D 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 C Req A Req B Req D to E Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume. GIBSON COMPANY Income Statements Bath Oil Color Gel Skin Cream Sales revenue Variable costs Contribution margin Fixed cost C S Net income Complete this question by entering your answers in the tabs below. Req A Req B Req D to E Req C 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.) Skin Cream Bath Oil Color Gel Percentage change in net income % % % Complete this question by entering your answers in the tabs below. Req A Req B Req C Req D to E 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