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Category > Accounting Posted 04 May 2017 My Price 10.00

Margin of safety and operating leverage

 

Margin of safety and operating leverage

Ireland 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)

71,000

111,000

39,000

Expected sales price (b)

$8

$4

$12

Variable costs per unit (c)

$5

$2

$7

Income Statements

      

Sales revenue (a 3 b)

$568,000

$444,000

$468,000

Variable costs (a 3 c)

(355,000)

(222,000)

(273,000)

Contribution margin

213,000

222,000

195,000

Fixed costs

(153,000)

(186,000)

(155,000)

Net income

$60,000

$36,000

$40,000

Required

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

b. Prepare revised income statements for each product, assuming a 20 percent increase 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 to its cosmetic line? Explain your answer.

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

 
 

Answers

Alpha Geek
(8)
Status NEW Posted 04 May 2017 09:05 AM My Price 10.00

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Attachments

file 1493888602-650517_1_636294004599481415_650517.xlsx preview (339 words )
Ma-----------rgi-----------n o-----------f s-----------afe-----------ty -----------and----------- op-----------era-----------tin-----------g l-----------eve-----------rag-----------eIr-----------ela-----------nd -----------Com-----------pan-----------y i-----------s c-----------ons-----------ide-----------rin-----------g t-----------he -----------add-----------iti-----------on -----------of -----------a n-----------ew -----------pro-----------duc-----------t t-----------o i-----------ts -----------cos-----------met-----------ics----------- li-----------ne.----------- Th-----------e c-----------omp-----------any----------- ha-----------s t-----------hre-----------e d-----------ist-----------inc-----------tly----------- di-----------ffe-----------ren-----------t o-----------pti-----------ons-----------: a----------- sk-----------in -----------cre-----------am,----------- a -----------bat-----------h -----------oil-----------, o-----------r a----------- ha-----------ir -----------col-----------ori-----------ng -----------gel-----------. R-----------ele-----------van-----------t i-----------nfo-----------rma-----------tio-----------n a-----------nd -----------bud-----------get-----------ed -----------ann-----------ual----------- in-----------com-----------e s-----------tat-----------eme-----------nts----------- fo-----------r e-----------ach----------- of----------- th-----------e p-----------rod-----------uct-----------s f-----------oll-----------ow.-----------Rel-----------eva-----------nt -----------Inf-----------orm-----------ati-----------onS-----------kin----------- Cr-----------eam-----------Bat-----------h O-----------ilC-----------olo-----------r G-----------elB-----------udg-----------ete-----------d s-----------ale-----------s i-----------n u-----------nit-----------s (-----------a)E-----------xpe-----------cte-----------d s-----------ale-----------s p-----------ric-----------e (-----------b)V-----------ari-----------abl-----------e c-----------ost-----------s
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