Question

Jordan 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
	Skin Cream				Bath Oil				Color Gel
Budgeted sales in units (a)		120,000				200,000				80,000
Expected sales price (b)	$	10			$	6			$	13
Variable costs per unit (c)	$	2			$	3			$	8
Income statements
Sales revenue (a × b)	$	1,200,000			$	1,200,000			$	1,040,000
Variable costs (a × c)		(240,000	)			(600,000	)			(640,000	)
Contribution margin		960,000				600,000				400,000
Fixed costs		(609,000	)			(435,000	)			(120,000	)
Net income	$	351,000			$	165,000			$	280,000

  
Required:

1. Determine the margin of safety as a percentage for each product.

2. Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.

3. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.

4. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?

5. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

	Skin Cream		Bath Oil		Color Gel
Margin of safety		%		%		%

JORDAN COMPANY
Income Statements
	Skin Cream	Bath Oil	Color Gel
Sales revenue
Variable costs
Contribution margin
Fixed cost
Net income

	Skin Cream		Bath Oil		Color Gel
Percentage change in net income		%		%		%

Answer 1