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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. 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
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Determine the margin of safety as a percentage for each product.
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Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
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For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
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Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?
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Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?
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