Question

Rooney 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)		128,000				208,000				88,000
Expected sales price (b)	$	9			$	7			$	14
Variable costs per unit (c)	$	2			$	4			$	9
Income statements
Sales revenue (a × b)	$	1,152,000			$	1,456,000			$	1,232,000
Variable costs (a × c)		(256,000	)			(832,000	)			(792,000	)
Contribution margin		896,000				624,000				440,000
Fixed costs		(693,000	)			(495,000	)			(140,000	)
Net income	$	203,000			$	129,000			$	300,000

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

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

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

a^

	ROONEY COMPANY Income Statements Skin Cream Bath Oil Color Gel Sales revenue Variable costs Contribution margin Fixed cost Net income

b^

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

c^

Answer 1

Req1:
STATEMENT SHOWING MARGIN OF SAFETY
				SKIN CREAM	BATH OIL	COLOR GEL
Sales revenue				1,152,000	1,456,000	1,232,000
Less: Variable cost				256,000	832000	792000
Contribution margon per unit				896000	624000	440000
Less: Fixed cost				693,000	495,000	140,000
Net operating income				203,000	129,000	300,000
CM rattio ( Contribution/Sales*100)				77.78%	42.86%	35.71%
Margin of safety (Net income/CM ratio)				260992.5	300979.9	840100.81
Margin of safety as %				22.66%	20.67%	68.19%
(Margin of Safety/ Total sales)
Req2:
ROONEY COMPANY
INCOME STATEMENT
				SKIN CREAM	BATH OIL	COLOR GEL
Sales revenue				1,382,400	1,747,200	1,478,400
Less: Variable cost				307,200	998400	950400
Contribution margon per unit				1,075,200	748,800	528,000
Less: Fixed cost				693,000	495,000	140,000
Net operating income				382,200	253,800	388,000
Req3: Percentage change in income
				SKIN CREAM	BATH OIL	COLOR GEL
Percentage change in income				88.28%	96.74%	29.33%
(Change in income/Earlier income *100)
Req4: Asumming the management is pessimistic, the management shall add to COLOR GEL product, as the margin of safety of the product is quite high as perentage of its total sales.