Gibson 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) 116,000 196,000 76,000Expected sales price (b) $6 $7 !2Variable costs per unit (c) $2 $3 $8Income statements Sales revenue (a b) $812,000 $1,176,000 912,000Variable costs (ax c) (232,000) (588,000) (608,000)Contribution margin (580,000) (588,000) (304,000)Fixed costs 405,000 405,000 88,000Net income $175,000 $183,000 $216,000Required: 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?