Finch 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. Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable ts (a x c) Contribution margin Fixed costs Net income Relevant Information Skin Cream Bath Oil Color Gel 112,000 192,000 $9 $2 $5 $2 $1,008,000 $864,000 (504,000) 360,000 (525,000) (375,000) (100,000) $259,000 $201,000 $260,000 72,000 $12 $7 $960,000 (224,000) (384,000) 784,000 576,000 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. c1. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

Finch 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. Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable ts (a x c) Contribution margin Fixed costs Net income Relevant Information Skin Cream Bath Oil Color Gel 112,000 192,000 $9 $2 $5 $2 $1,008,000 $864,000 (504,000) 360,000 (525,000) (375,000) (100,000) $259,000 $201,000 $260,000 72,000 $12 $7 $960,000 (224,000) (384,000) 784,000 576,000 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. c1. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Master Budget

A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.

Sales Budget and Selling

A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.

Question

A-1

Finch 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.
Budgeted sales in units (a)
Expected sales price (b)
Variable costs per unit (c)
Income statements
Sales revenue (a x b)
Variable
sts (a x c)
Contribution margin
Fixed costs
Net income
Req A
Req B
Sales revenue
Variable costs
Contribution margin
Fixed cost
Net income
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.
c1. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
c2. Which product has the highest operating leverage?
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?
Req C1
Relevant Information
Skin Cream
112,000
Complete this question by entering your answers in the tabs below.
FINCH COMPANY
Income Statements
Skin Cream
$9
$2
$1,008,000
$960,000
$864,000
(224,000) (384,000) (504,000)
784,000 576,000
360,000
(525,000) (375,000) (100,000)
$259,000 $201,000 $260,000
Bath Oil Color Gel
192,000 72,000
$5
$2
$12
$7
Req C2 to E
Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
Bath Oil
Color Gel

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