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Question 6 Ivan Co. (Ivan) currently produces a single product, OP. Budgeted operating information for expected sales of 40,000 units is as follows: Sales $2,000,000 Cost of goods sold Variable manufacturing costs $ 300,000 Fixed manufacturing costs 600,000 $ 900,000 Gross profits $1,100,000 Selling and administrative expenses Sales commission (9% of selling price) $ 180,000 Fixed advertising expenses 266,000 Fixed administrative expenses 350.000 $ 796,000 Operating income before taxes $ 304,000 Income tax (40%) 121,600 Net income $ 182,400 Fixed manufacturing costs are allocated at a rate of $2.50 per machine hour. Ivan's management is considering the introduction of a new product, NZ, to diversify its product lines and use up all available machine hour capacity. Ivan estimates the following sales and costs related to NZ: Expected sales Selling price per unit Variable manufacturing cost per unit Fixed manufacturing cost (allocated) per unit Sales commission per unit (15% of selling price) Incremental fixed advertising expenses Incremental fixed administrative expenses 10,000 units $20 $9 $5 $3 $32,000 $16,000 Required: a) Assume that Ivan produces OP only. Calculate Ivan's margin of safety ratio. b) Assume that Ivan starts producing NZ, and that the estimates above occur as expected. Calculate Ivan's new margin of safety ratio. c) Calculate the impact to Ivan's operating income before taxes if both OP and NZ are produced, and discuss whether Ivan should diversify its product line, including why

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