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, 2022, Kaiser’s break-even point was $1.5 million. On sales of $1.5 million, its GAAP income statement showed a gross profit of $242,500, direct materials cost of $500,000, and direct labor costs of $625,000. The contribution margin was $180,000, and variable manufacturing overhead was $62,500.

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 20%. What is the maximum increased advertising cost the company can incur and still report the same income as before the advertising expenditure, assuming that the contribution margin ratio remains unchanged?