Ritchie Manufacturing Company makes a product that it sells for $190 per unit. The company incurs variable manufacturing costs of $93 per unit. Variable selling expenses are $21 per unit, annual fixed manufacturing costs are $502,000, and fixed selling and administrative costs are $204,800 per year.

Required

Determine the break-even point in units and dollars using each of the following approaches:

1. Use the equation method.

2. Use the contribution margin per unit approach.

3. Prepare a contribution margin income statement for the break-even sales volume.

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?