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Rundle Company is considering the addition of a new product toits cosmetics line. The...

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Accounting

Rundle Company is considering the addition of a new product toits cosmetics line. The company has three distinctly differentoptions: a skin cream, a bath oil, or a hair coloring gel. Relevantinformation and budgeted annual income statements for each of theproducts follow.

Relevant Information
Skin CreamBath OilColor Gel
Budgeted sales in units (a)126,000206,00086,000
Expected sales price (b)$8$6$13
Variable costs per unit (c)$2$4$9
Income statements
Sales revenue (a × b)$1,008,000$1,236,000$1,118,000
Variable costs (a × c)(252,000)(824,000)(774,000)
Contribution margin756,000412,000344,000
Fixed costs(576,000)(320,000)(108,000)
Net income$180,000$92,000$236,000

  
Required:

Determine the margin of safety as a percentage for eachproduct.

Prepare revised income statements for each product, assuming a20 percent increase in the budgeted sales volume.

For each product, determine the percentage change in net incomethat results from the 20 percent increase in sales.

Which product has the highest operating leverage?

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

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

Answer & Explanation Solved by verified expert
3.6 Ratings (280 Votes)
Compution of Margin of safetyas percentage of each produtSnoProductsComputationMos on salesvalumPercentage ofMoson sales1SkinMosNet incomeContributionper unit30000units18000062380300001800002Bath oilMosNet incomeContributionper unit46000units9200022233460002060003Color GelMosNet incomeContributionper    See Answer
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In: AccountingRundle Company is considering the addition of a new product toits cosmetics line. The company...Rundle Company is considering the addition of a new product toits cosmetics line. The company has three distinctly differentoptions: a skin cream, a bath oil, or a hair coloring gel. Relevantinformation and budgeted annual income statements for each of theproducts follow.Relevant InformationSkin CreamBath OilColor GelBudgeted sales in units (a)126,000206,00086,000Expected sales price (b)$8$6$13Variable costs per unit (c)$2$4$9Income statementsSales revenue (a × b)$1,008,000$1,236,000$1,118,000Variable costs (a × c)(252,000)(824,000)(774,000)Contribution margin756,000412,000344,000Fixed costs(576,000)(320,000)(108,000)Net income$180,000$92,000$236,000  Required:Determine the margin of safety as a percentage for eachproduct.Prepare revised income statements for each product, assuming a20 percent increase in the budgeted sales volume.For each product, determine the percentage change in net incomethat results from the 20 percent increase in sales.Which product has the highest operating leverage?Assuming that management is pessimistic and risk averse, whichproduct should the company add to its cosmetics line?Assuming that management is optimistic and risk aggressive,which product should the company add to its cosmetics line?

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