11-29

Problem 11-29 Margin of safety and operating leverage Hampton 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 informa- tion and budgeted annual income statements for each of the products follow. Relevant Information Bath Oil 216,000 $2.00 1.006.00 $840,000 $864,000 $720,000 240,000)216,000 (432,000) Skin Cream Color Gel Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable costs (a c) Contribution margin Fixed costs Net income 120,000 $7.00 72,000 10.00 4.00 600,000 648,000 288,000 (480,000)540,000) 120,000 $120,000 $108,000 $168,000 Required a. Determine the margin of safety as a percentage for each product. Round your figures to two deci- mal points geted sales volume. increase in sales. Which product has the highest operating leverage? Round your figures to two b. Prepare revised income statements for each product, assuming a 25 percent increase in the bud- c. For each product, determine the percentage change in net income that results from the 25 percent d. Assuming that management is pessimistic and risk averse, which product should the company add e. Assuming that management is optimistic and risk aggressive, which product should the company decimal points. to its cosmetics line? Explain your answer. add to its cosmetics line? Explain your