Question

Kaiser Industries carries no inventories. Its product is manufactured only when a customer’s order is received. It is then shipped immediately after it is made. For its fiscal year ended October 31, 2017, Kaiser’s break-even point was $ 1.37 million. On sales of $ 1.17 million, its income statement showed a gross profit of $ 177,000, direct materials cost of $ 401,000, and direct labor costs of $ 507,000. The contribution margin was $ 177,000, and variable manufacturing overhead was $ 51,000.

(a) Calculate the following: (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answers to 0 decimal places, e.g. 1,225.)

1. Variable selling and administrative expenses.

2. Fixed manufacturing overhead.

3. Fixed selling and administrative expenses.

(b) Ignoring your answer to part (a), assume that fixed manufacturing overhead was $ 102,000 and the fixed selling and administrative expenses were $ 76,000. The marketing vice president feels that if the company increased its advertising, sales could be increased by 20%. What is the maximum increased advertising cost the company can incur and still report the same income as before the advertising expenditure?

Maximum increased advertising expenditure =

Answer 1

(a)

Part 1)

The value of variable selling and administrative expenses is determined as below:

Variable Selling and Administrative Expenses = Sales - Direct Material Costs - Direct Labor Costs - Variable Manufacturing Costs - Contribution Margin

Substituting values in the above formula, we get,

Variable Selling and Administrative Expenses = 1,170,000 - 401,000 - 507,000 - 51,000 - 177,000 = $34,000 (answer for Part 1)

_____

Part 2)

The value of fixed manufacturing overhead is determined as follows:

Fixed Manufacturing Overhead = Sales - Direct Material Costs - Direct Labor Costs - Variable Manufacturing Costs - Gross Profit

Substituting values in the above formula, we get,

Fixed Manufacturing Overhead = 1,170,000 - 401,000 - 507,000 - 51,000 - 177,000 = $34,000 (answer for Part 2)

_____

Part 3)

To calculate fixed selling and administrative expenses, we need to arrive at the value of total fixed costs with the use of break-even point formula as below:

Break-Even Point = Total Fixed Costs/Contribution Margin Ratio where Contribution Margin Ratio = Contribution Margin/Sales

Substituting values in the above formula, we get,

1,370,000 = Total Fixed Costs/(177,000/1,170,000)

Rearranging values, we get,

Total Fixed Costs = 1,370,000*(177,000/1,170,000) = $207,256.41

Now, we can calculate the value of fixed selling and administrative expenses as follows:

Fixed Selling and Administrative Expenses = Total Fixed Costs - Fixed Manufacturing Overhead = 207,256.41 - 34,000 = $173,256 (answer for Part 3)

_____

b)

The value of maximum increased advertising expenditure is calculated as below:

Maximum Increased Revenue Expenditure = (Current Revenues and Expenses)*(1+Revenue Increase Percentage) - Manufacturing Overhead = (102,000 + 76,000)*(1 + 20%) - 102,000 = $111,600