Stuart 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)		132,000				212,000				92,000
Expected sales price (b)	$	7			$	7			$	14
Variable costs per unit (c)	$	2			$	4			$	10
Income statements
Sales revenue (a b)	$	924,000			$	1,484,000			$	1,288,000
Variable costs (a c)		(264,000	)			(848,000	)			(920,000	)
Contribution margin		660,000				636,000				368,000
Fixed costs		(525,000	)			(525,000	)			(120,000	)
Net income	$	135,000			$	111,000			$	248,000

Required:

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

b. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.

c. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

d. Which product has the highest operating leverage?

e. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?

f. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

A.

	Skin Cream	Bath Oil	Color Gel
Margin of Safety	%	%	%

B.

STUART COMPANY
Income Statements
	Skin Cream	Bath Oil	Color Gel
Sales Revenue
Variable Costs
Contribution Margin
Fixed Cost
Net Income

C. 1

	Skin Cream	Bath Oil	Color Gel
Percentage Change in net income	%	%	%

C. 2-E.

Which product has the highest operating leverage?
Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?
Assuming that management is optimistic should the company add to its cosmetic line?