Margin of safety and operating leverage Meier Company has three distinctly different options available as it considers adding a new product to its automotive division: engine oil, coolant, or windshield washer. Relevant information and budgeted annual income statements for each product follow: 

.:.

Required

a. Determine the margin of safety as a percentage for each product.

b. Prepare revised income statements for each product, assuming 20 percent growth 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. Which product has the highest operating leverage?

d. Assuming that management is pessimistic and risk averse, which product should the company add? Explain your answer.

e. Assuming that management is optimistic and risk aggressive, which product should the company add? Explain your answer

Transcribed Image Text:

Relevant Information Windshield Engine Oil Coolant Washer Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) 20,000 $2.40 30,000 $2.85 $1.25 125,000 $1.15 $0.35 $1.00 Income Statements Sales revenue (a x b) $48,000 $85,500 $143,750 Variable costs (a x c) Contribution margin (37,500) 48,000 (32,000) $16,000 (20,000) (43,750) 100,000 (50,000) $ 50,000 28,000 (21,000) Fixed costs $ 7,000 Net income