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 $1.34 million. On sales of $1.19 million, its income statement showed a gross profit of $165,000, direct materials cost of $404,500, and direct labor costs of $505,700. The contribution margin was $165,000, and variable manufacturing overhead was $51,600.

(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.)

(b) Ignoring your answer to part (a), assume that fixed manufacturing overhead was $100,100 and the fixed selling and administrative expenses were $75,800. 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?

1. Variable selling and administrative expenses.

$

2. Fixed manufacturing overhead.

$

3. Fixed selling and administrative expenses.

$

Explanation / Answer

To calculate the contribution margin .. The contribution margin is calculated by subtracting all variable costs from sales. The formula is:

Sales - Variable expenses

contribution margin= $165000

Sales = $1.19 million

$165000 = $1.19 million- variable cost

variable cost = $1025000

variable manufacturing overhead was $51,600. therefore Variable selling and administrative expenses is $1025000- $51,600= $973400

To calculate the breakeven point, divide total fixed expenses by the contribution margin. Contribution margin is sales minus all variable expenses, divided by sales. The formula is:

Total fixed expenses
Contribution margin %

Break even point = $1.34 million

1.34million= Total fixed expenses /165000/1.19million

Total fixed expenses = 185798

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