Kaiser Industries carries no inventories. Its product is manufactured only when

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, 2014, Kaiser’s break-even point was $1.38 million. On sales of $1.17 million, its income statement showed a gross profit of $171,000, direct materials cost of $404,600, and direct labor costs of $506,200. The contribution margin was $171,000, and variable manufacturing overhead was $51,100. (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 $81,100. The marketing vice president feels that if the company increased its advertising, sales could be increased by 19%.

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 $

Explanation / Answer

(a)

(1) Contribution margin = Sales - Direct material - Direct labor - Variable manufacturing overhead - variable selling/admin expense

171,000 = 1,170,000 - 404,600 - 506,200 - 51,100 - variable selling/admin expense

variable selling/admin expense = $37,100.00

(2) Gross profit = Sales - direct material - direct labor - Variable manufacturing overhead - fixed manufacturing overhead

171,000 = 1,170,000 - 404,600 - 506,200 - 51,100 - fixed manufacturing overhead

fixed manufacturing overhead = $37,100.00

(3) Breakeven point = Total fixed cost / (Contribution margin ratio)

Let Fixed selling & admin expenses be F. Then,

1,380,000 = (37,100 + F) / (171,000 / 1,170,000)

1,380,000 = (37,100 + F) / 0.1462

201,692.31 = 37,100 + F

F = $164,592.31

NOTE: The first question with all sub-parts is answered in full.

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