Chapter 5, Problem 5.6AP

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. Kaisers break-even point was $1.3 million. On sales of $1.2 million, its income statement showed a gross profit of $180,000, direct materials cost of $400,000, and direct labor costs of $500,000. The contribution margin was $180,000, and variable manufacturing overhead was $50,000.

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 fixed manufacturing overhead was $100,000 and the fixed selling and administrative expenses were $80,000. The marketing vice president feels that if the company increased its advertising, sales could be increased by 25%. What is the maximum increased advertising cost the company can incur and still report the same income as before the advertising expenditure?

(CGA adapted)