Problem 11-29 Margin of safety and operating leverage LO 11-6 Munoz Company is c
ID: 2330809 • Letter: P
Question
Problem 11-29 Margin of safety and operating leverage LO 11-6 Munoz 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 Bath Oil Skin Cream 122,000 Color Ge Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) variable costs (a x c) Contribution margin Fixed costs 202,000 82,000 14 $1,342,000 $1,616,000 1,148,000 (244,000) (606,000)(656 1,098,000 (720,000) 492,000 (150,000 $260,000 342,000 1,010,000 (750,000) Net income 378, 000 Required: a. Determine the margin of safety as a percentage for each product. b. Prepare revised income statements for each product. assumina a 20 percent increase in the budaeted sales volun currentssh2200.mp4.zip Installing SSH.html.zip | Using-SSH-FTP.pdf sx 6,091 9Explanation / Answer
ANSWER TO PART 1 Step 1: Calculation of Contribution margin per unit of each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Expected sales price 11 8 14 (b) Less: Variable cost per unit 2 3 8 (c ) Contribution Margin per unit [(a) - (b)] 9 5 6 Step 2: Calculation of Contribution margin ratio of each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Expected sales price 11 8 14 (b) Less: Variable cost per unit 2 3 8 (c ) Contribution Margin per unit [(a) - (b)] 9 5 6 (d) Contribution Margin ratio [(c )/(a)]*100 81.82% 62.50% 42.86% Step 3: Calculation of Break even sales in dollars of each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Fixed costs 720000 750000 150000 (b) Contribution Margin ratio 81.82% 62.50% 42.86% (c ) Break even sales in Dollars [(a)/(b)] 880000 1200000 350000 Step 4: Calculation of Margin of safety of each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Actual sales revenue in Dollars 1342000 1616000 1148000 (b) Break even sales in Dollars 880000 1200000 350000 (c ) Margin of safety [(a) - (b)] 462000 416000 798000 Step 5: Calculation of Margin of safety as a percentage for each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Actual sales revenue in Dollars 1342000 1616000 1148000 (b) Break even sales in Dollars 880000 1200000 350000 (c ) Margin of safety [(a) - (b)] 462000 416000 798000 (d) Margin of safety as a percentage for each product ([(c )/(a)]*100) 34% 26% 70% ANSWER TO PART 2 Step 1: Calculation of Contribution margin per unit of each product S.NO Particulars Skin Cream Bath Oil Color Gel (a) Budgeted sales in units 122000 202000 82000 (b) Add: Percentage increase of 20% [(a)*20%] 24400 40400 16400 (c ) Budgeted sales in units after percentage increase of 20% [(a) + (b)] 146400 242400 98400 (d) Expected sales price 11 8 14 (e ) Sales revenue [(c ) * (d)] 1610400 1939200 1377600 (f) Variable cost per unit 2 3 8 (g) Total variable costs [(c )*(f)] 292800 727200 787200 Step 2: Revised Income statement S.NO Particulars Skin Cream Bath Oil Color Gel (a) Sales revenue 1610400 1939200 1377600 (b) Variable costs 292800 727200 787200 (c ) Contribution Margin [(a) - (b)] 1317600 1212000 590400 (d) Fixed costs 720000 750000 150000 (e ) Net Income [( c ) - (d)] 597600 462000 440400