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Adams 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)
102,000
182,000
62,000
Expected sales price (b)
$ 8
$ 3
$ 10
Variable costs per unit (c)
$ 2
$ 1
$ 6
Income statements
Sales revenue (a x b)
$ 816,000
$ 546,000
$ 620,000
Variable costs (a x c)
(204,000)
(182,000)
(372,000)
Contribution margin
612,000
364,000
248,000
Fixed costs
(360,000)
(200,000)
(60,000)
Net income
$ 252,000
$ 164,000
$ 188,000
Question A. Determine the margin of safety as a percentage for each product.
Question B. revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume.
Question C. For each product, determine the percentage change in net income that results from the 20 percent increase in sales.
Question D.Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line?
Question E. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?
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