Question

Baird 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)		104,000				184,000				64,000
Expected sales price (b)	$	9			$	4			$	11
Variable costs per unit (c)	$	2			$	1			$	6
Income statements
Sales revenue (a × b)	$	936,000			$	736,000			$	704,000
Variable costs (a × c)		(208,000	)			(184,000	)			(384,000	)
Contribution margin		728,000				552,000				320,000
Fixed costs		(441,000	)			(315,000	)			(80,000	)
Net income	$	287,000			$	237,000			$	240,000

  
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?

Answer 1