Answered Essay: Rooney 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 o

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Rooney 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. 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. d. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? e. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

Expert Answer

 

Skin cream Batch oil Color Gel
Contribution margin ratio
Contribution/Sales *100 77.78% 42.86% 35.71%
Margin of Safety = Net income/Contribution margin ratio 260993 300980 840101
Total sales 1152000 1456000 1232000
a) Margin of safety as a percentage 22.66% 20.67% 68.19%
b) Expected sales volume with 20% increase 153600 249600 105600
Contribution margin(Selling price – Variable cost) 7 3 5
Contribution 1075200 748800 528000
Fixed cost -693000 -495000 -140000
Net income 382200 253800 388000
c) Previous net income 203000 129000 300000
Net income after increase 382200 253800 388000
% increase 88.28% 96.74% 29.33%
d) If the company is risk averse, Batch oil may be added to its product line as it has the highest increase in net income
e) If the company is optimistic,then Color Gel may be added as it is the product with highest fixed cost and least increase in net income inspite of increase in sales volme
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