Question
In: Accounting
Walton Company is considering the addition of a new product to its cosmetics line. The company...
Walton 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) | 138,000 | 218,000 | 98,000 | |||||||||
| Expected sales price (b) | $ | 10 | $ | 9 | $ | 16 | ||||||
| Variable costs per unit (c) | $ | 2 | $ | 4 | $ | 10 | ||||||
| Income statements | ||||||||||||
| Sales revenue (a × b) | $ | 1,380,000 | $ | 1,962,000 | $ | 1,568,000 | ||||||
| Variable costs (a × c) | (276,000 | ) | (872,000 | ) | (980,000 | ) | ||||||
| Contribution margin | 1,104,000 | 1,090,000 | 588,000 | |||||||||
| Fixed costs | (912,000 | ) | (950,000 | ) | (198,000 | ) | ||||||
| Net income | $ | 192,000 | $ | 140,000 | $ | 390,000 | ||||||
Required:
-
Determine the margin of safety as a percentage for each product.
-
Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
-
For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
-
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?
a
|
|||||||||||||||
b
| WALTON COMPANY | |||
| Income Statements | |||
| Skin Cream | Bath Oil | Color Gel | |
| Sales revenue | not attempted | not attempted | not attempted |
| Variable costs | not attempted | not attempted | not attempted |
| Contribution margin | $0 | $0 | $0 |
| Fixed cost | not attempted | not attempted | not attempted |
| Net income | $0 | $0 | $0 |
c
|
|||||||||
d
| Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? | not attempted |
| Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? |
Solutions
ekkarill92 answered 1 year agoRelated Solutions
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