P5-6B Mega Electronix carries no inventories. Its product is manufactured only w
ID: 2570916 • Letter: P
Question
P5-6B Mega Electronix 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 fi scal year ended October 31, 2017, Mega’s break-even point was $2.4 million. On sales of $2 million, its income statement showed a gross profi t of $400,000, direct materials cost of $600,000, and direct labor costs of $700,000. The contribution margin was $150,000, and variable manufacturing overhead was $200,000. Instructions (a) Calculate the following: 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 fi xed manufacturing overhead was $100,000 and the fi xed selling and administrative expenses were $80,000. The marketing vice president feels that if the company increased its advertising, sales could be increased by 15%. What is the maximum increased advertising cost the company can incur and still report the same income as before the advertising expenditure? (CGA adapted)
Explanation / Answer
Gross profit= Sales- Direct material-direct labour-variable mfg overhead-Fixed mfg overhead
400000=2000000-600000-700000-200000-x
X=100000
Contribution margin=sales-variable costs
Variable costs=2000000-1500000=500000
Variable costs= Direct material+direct labour+var mfg overhead+var sG&A
Variable selling and administrative expenses=(600000+700000+200000)-500000
=1000000
Breakeven sales=(Fixed costs/(Contrbution margin))*sales
Contribution margin ratio= contribution margin/sales
=150000/(2*10^6)=7.5%
Fixed costs=(2400000/2000000)*150000=180000
Fixed selling and admin exp=180000-100000=80000
Net income= Contribution margin-fixed costs
=150000-180000=-30000
b) Increase in ad expense is increase in Fixed selling exp
Sales increase new =2mn*1.15=2300000
Net income remains same and it is 70000
Net income= Contribution margin-fixed mfg overhead-fixed selling exp
Fixed selling epx=(150000*1.15)-100000-(-30000)
=102500
Here we can see there is increase in costs by 102500-100000=2500
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