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 $1.34 million. On sales of $1.17 million, its income statement showed a gross profit of $177,000, direct materials cost of $406,000, and direct labor costs of $501,000. The contribution margin was $177,000, and variable manufacturing overhead was $49,000.

(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 $83,000. The marketing vice president feels that if the company increased its advertising, sales could be increased by 21%. 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) 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.		$37000
2.		Fixed manufacturing overhead.		$37000
3.		Fixed selling and administrative expenses.		$165718

Variable selling and administrative expenses :-

Sale - direct materials cost - direct labor costs - variable manufacturing overhead - Variable selling and administrative expenses = contribution margin

$1170000 - $406000 - $501000 - $49000 - Variable selling and administrative expenses = $177000

Variable selling and administrative expenses = $37000

Fixed manufacturing overhead:-

Sale - direct materials cost - direct labor costs - variable manufacturing overhead – Fixed manufacturing overhead = Gross profit

$1170000 - $406000 - $501000 - $49000 - Fixed manufacturing overhead = $177000

Fixed manufacturing overhead = $37000

Fixed selling and administrative expenses.:-

Total Fixed cost = BEP * contribution margin/sale

           = $1340000 * $177000/$1170000 = $202718

Fixed selling and administrative expenses = $202718 - $37000 = $165718

(b) Ignoring your answer to part (a), assume that fixed manufacturing overhead was $102,000 and the fixed selling and administrative expenses were $83,000. The marketing vice president feels that if the company increased its advertising, sales could be increased by 21%. 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

$

158948

Before advertising increase:-

Operating Income (Loss) = Contribution – Fixed cost

$177000 - $202718 = ($25718)

After Advertising increase :-

Sale ($1170000 * 121%) = $1415700

Materials = ($406000 * 121%) = $491260

Labor = ($501000 * 121%) = $606210

Fixed manufacturing OH = $102000

Fixed selling and admin exp = $83000

Operating Income (Loss) = Sale – Material – Labor – Fixed manufacturing OH – fixed selling OH – Advertising cost

($25718) = $1415700 - $491260 - $606210 - $102000 - $83000 – Advertising cost

Advertising cost = $158948