Question 1(25 Marks)

Quality construction Products produces a variety of items for the construction market. The recession has been especially hard on the construction sector which has resulted in declining sales for the past five years,

At a strategic planning session management was introduced to new product development and Kaizen costing as methods to improve profitability and utilize some idle capacity due to the declining sales. The management has been reviewing the option of introducing some wooden tiles and other decorative products both locally and throughout the Caribbean. Management believes that sales revenues from the present market decrease by 8% in the next year as the recession slows down. Management still wants to achieve increase profits during the rest year. To this end they are including the budgeted value of the new opportunity to produce these new wood products for new construction as well as persons doing refurbishments. The most recent income statement is given below before incorporating the new product.

Revenues	21,500,000
Cost of goods sold	14,625,000
Gross profit		6,875,000
Operating expenses
Quality testing and assurance	615,225
Marketing cost	1,025,380
Distributive cost	604,275
Customer service cost (designs)	547,130
Administrative cost	3,017,360
Total operating cost		5,809,370
Operating income		1,065,630
Other expenses (interest)		(125,750)
Income before taxes		939,880
Income taxes		(234,970)
Net income		$ 704,910

Question 1 (continued)

Additional information for existing production.

The management team has determined to make the following cost adjustments. The direct material is 30% of the Cost of Goods Sold. There will be a 8% increase in material cost as a result of the increase in the Social Responsibility Levy. Direct labor which is 40 % of cost of goods sold will decrease by 10% due to the new automated system which also provides a 12% decrease in the variable overhead.

The fixed manufacturing overhead will not be affected by this reduction in sales. The manufacturing overhead is 40% variable and 60% fixed. Management plans to increase the price of the original product by 5% in 2017 to help offset the increase taxes enforced on these types of products by the government.

Quality Testing and Assurance is a key cost and due to the additional product will increase by 20%. Marketing and Interest cost will also increase by 12% and 6% respectively due to the new product line. The other operating expenses will be reduced as follows: Customer service cost 2.5%, distribution cost 3.5% and Administrative cost 4%.

The projected information for the new product is as follows:

Budgeted sales in units	24,000
Budgeted selling price per unit	$100.00
Average cost material per unit	$35.00
Labour cost per unit	$ 22.00
Batch levels cost per batch	$4,375.00
Number of units per batch	500
Miscellaneous shipping brokerage and transportation cost	10% of sales

Required

1. Prepare the budgeted income statement if the Kaizen costing adjustments are realized for the next year and the new product is launched based on the sales estimates. (25 Marks)