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Problem 11-29A (Algo) Margin of safety and operating leverage LO 11-4, 11-6 Walton 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 costs (a x c) Contribution margin Fixed costs Net income Req A $ $ Req B Margin of safety Skin Cream 138,000 $1,380,000 (276,000) 10 2 1,104,000 Req C Relevant Information Bath Oil 218,000 (912,000) $ 192,000 Bath Oil Req D to E % $ $ 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? Complete this question by entering your answers in the tabs below. $1,962,000 (872,000) 9 4 1,090,000 < Req A (950,000) $ 140,000 Color Gel Color Gel 98,000 Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage values.) Skin Cream $ $ % $1,568,000 (980,000) 588,000 (198,000) $ 390,000 16 10 Req B >

Problem 11-29A (Algo) Margin of safety and operating leverage LO 11-4, 11-6 Walton 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 costs (a x c) Contribution margin Fixed costs Net income Req A $ $ Req B Margin of safety Skin Cream 138,000 $1,380,000 (276,000) 10 2 1,104,000 Req C Relevant Information Bath Oil 218,000 (912,000) $ 192,000 Bath Oil Req D to E % $ $ 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? Complete this question by entering your answers in the tabs below. $1,962,000 (872,000) 9 4 1,090,000 < Req A (950,000) $ 140,000 Color Gel Color Gel 98,000 Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage values.) Skin Cream $ $ % $1,568,000 (980,000) 588,000 (198,000) $ 390,000 16 10 Req B >

FINANCIAL ACCOUNTING
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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### Problem 11-29A (Algo) Margin of Safety and Operating Leverage LO 11-4, 11-6 **Scenario:** Walton Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options to consider: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products are as follows: #### Relevant Information | | Skin Cream | Bath Oil | Color Gel | |-------------------------|------------|----------|-----------| | **Budgeted sales in units (a)** | **138,000** | **218,000** | **98,000** | | **Expected sales price (b)** | $10 | $9 | $16 | | **Variable cost per unit (c)** | $6 | $5 | $10 | #### Income Statements | | Skin Cream | Bath Oil | Color Gel | |-------------------------|-------------|------------|------------| | **Sales revenue (a × b)** | $1,380,000 | $1,962,000 | $1,568,000 | | **Variable costs (a × c)** | (828,000) | (1,090,000) | (980,000) | | **Contribution margin** | 552,000 | 872,000 | 588,000 | | **Fixed costs** | (360,000) | (732,000) | (198,000) | | **Net income** | $192,000 | $140,000 | $390,000 | #### Required Tasks - **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?** **Instructions:** -
Transcribed Image Text:### Problem 11-29A (Algo) Margin of Safety and Operating Leverage LO 11-4, 11-6 **Scenario:** Walton Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options to consider: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products are as follows: #### Relevant Information | | Skin Cream | Bath Oil | Color Gel | |-------------------------|------------|----------|-----------| | **Budgeted sales in units (a)** | **138,000** | **218,000** | **98,000** | | **Expected sales price (b)** | $10 | $9 | $16 | | **Variable cost per unit (c)** | $6 | $5 | $10 | #### Income Statements | | Skin Cream | Bath Oil | Color Gel | |-------------------------|-------------|------------|------------| | **Sales revenue (a × b)** | $1,380,000 | $1,962,000 | $1,568,000 | | **Variable costs (a × c)** | (828,000) | (1,090,000) | (980,000) | | **Contribution margin** | 552,000 | 872,000 | 588,000 | | **Fixed costs** | (360,000) | (732,000) | (198,000) | | **Net income** | $192,000 | $140,000 | $390,000 | #### Required Tasks - **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?** **Instructions:** -
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