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Solomon 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)		130,000				210,000				90,000
Expected sales price (b)	$	10			$	9			$	15
Variable costs per unit (c)	$	2			$	4			$	9
Income statements
Sales revenue (a b)	$	1,300,000			$	1,890,000			$	1,350,000
Variable costs (a c)		(260,000	)			(840,000	)			(810,000	)
Contribution margin		1,040,000				1,050,000				540,000
Fixed costs		(816,000	)			(850,000	)			(174,000	)
Net income	$	224,000			$	200,000			$	366,000

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?

Solomon 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 130,000 210,000 90,000 $ 10 $ $ 15 $ 2 $ $ 9 Budgeted sales in units (a) Expected sales price (b) Variable costs per unit (c) Income statements Sales revenue (a x b) Variable costs ( ac) Contribution margin Fixed costs Net income $1,300,000 (260,000) 1,040,000 (816,000) $ 224,000 $1,890,000 (840,000) 1,050,000 (850,000) $ 200,000 $1,350,000 (810,000) 540,000 (174,000) $366,000 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. 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. Reg A ReqB ReqC Reg D to E Determine the margin of safety as a percentage for each product. (Round your answers to whole percentage values.) Skin Cream Bath On Color Gel Margin of safety % % % ROGA ReqB > Complete this question by entering your answers in the tabs below. Req A Req B ReqC Reg D to E Prepare revised income statements for each product, assuming a 20 percent increase in the budgeted sales volume. SOLOMON COMPANY Income Statements Skin Cream Bath Oil Color Gel Sales revenue Variable costs Contribution margin Fixed cost Net income Complete this question by entering your answers in the tabs below. Req A Req B ReqC Reg D to E For each product, determine the percentage change in net income that results from the 20 percent increase in sales. (Round your answers to whole percentage values.) Skin Cream Bath Oil Color Gel Percentage change in net income % % Complete this question by entering your answers in the tabs below. Req A Reg B ReqC Reg D to E Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line?

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