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Kaiser Industries does not carry inventories. Its product is manufactured only when a customer's...

Question:

Kaiser Industries does not carry 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 $1.33 million. On sales of $1.19 million, its income statement showed a gross profit of $168,000, direct materials cost of $409,000, and direct labor costs of $507,000. The contribution margin was $168,000, and variable manufacturing overhead was $50,000.

(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 $81,000. 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?

Product Costing:

Product costing is the assignment of costs to the units of output produced by a company. These costs may include raw materials, labor costs, and manufacturing overhead. There are different approaches to product costing such as variable costing (direct costing), where only variable manufacturing costs are considered product costs; and absorption costing (full costing), where all manufacturing costs are treated as product costs.

Answer and Explanation:

a. 1. contribution margin = net sales - variable production cost - variable selling & administrative

$168,000 = $1,190,000 - ($409,000 + $507,000 + $50,000) - variable selling & administrative

variable selling & administrative = $56,000

2. cost of goods sold = net sales - gross profit

cost of goods sold = $1,190,000 - $168,000

cost of goods sold = $1,022,000

cost of goods sold = direct materials + direct labor + variable overhead + fixed overhead

$1,022,000 = $409,000 + $507,000 + $50,000 = fixed overhead

fixed overhead = $56,000

3. break-even point in sales = fixed costs / (contribution margin ratio)

$1,330,000 = fixed costs / ($168,000 / $1,190,000)

fixed costs = $187,765

fixed costs = fixed overhead + fixed selling and administrative

$187,765 = $56,000 + fixed selling and administrative

fixed selling and administrative = $131,765

b. contribution margin ratio = contribution margin / sales

contribution margin ratio = $168,00 / $1,190,000 = 14.12%

increase in sales = $1,190,000 x 19%

increase in sales = $226,100

Of this, $31,925 ($226,100 x 14.12%) of contribution margin will be available to cover for fixed expenses. Thus, the maximum increased advertising cost is $31,925.


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