Problem 11-29 Margin of safety and operating leverage Lo Rooney Company is consi

Question

Problem 11-29 Margin of safety and operating leverage Lo Rooney Company is considering the addition of a new product to is a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the follow 11-6 cosmetics line. The company has three distinctly difeent Expected sales price (b) Variable costs per unit (c) Sales revenue (a x b) variable costs (a x c) Contribution margin Fixed costS 693,000 5//300,000 Required a. Determine the margin of safety as a percentage for each product b. Prepare revised income statements for each product/ essuminga 2 c. For each product, determine the percentage change itn net income that d. Assuming that management is pessimistic and risk averse. which product should the compeny add to ts oNext

Explanation / Answer

margin of saftey = (current sales unit - break even sales unit) / current sales

breakeven sales = fixed cost / contribution per unit

question b,c -

percentage increase in net income =
= (net income on increased sales - net income on budgted sales ) / net income on budgt sales

skin cream bath oil color gel current salesunits 128000 208000 88000 sale price 9 7 14 less variable cost 2 4 9 contr per unit 7 3 5 sale revenue 1152000 1456000 1232000 less variable cost 256000 832000 792000 contribution 896000 624000 440000 less fixed cost 693000 495000 140000 net income 203000 129000 300000 breakeven sale 99000 165000 28000 margin of saftey 22.66% 20.67% 68.18%

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