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Homework answers / question archive / Solomon Company is considering the addition of a new product to its cosmetics line

Solomon Company is considering the addition of a new product to its cosmetics line

Accounting

Solomon 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)   130,000       210,000       90,000  
Expected sales price (b) $ 10     $ 9     $ 15  
Variable costs per unit (c) $ 2     $ 4     $ 9  
Income statements                      
Sales revenue (a × b) $ 1,300,000     $ 1,890,000     $ 1,350,000  
Variable costs (a × c)   (260,000 )     (840,000 )     (810,000 )
Contribution margin   1,040,000       1,050,000       540,000  
Fixed costs   (816,000 )     (850,000 )     (174,000 )
Net income $ 224,000     $ 200,000     $ 366,000  
 

  
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?

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