Sherry and John Enterprises are using the kaizen approach to budgeting for 2018. The budgeted income statement for January 2018 is as follows: Sales (168,000 units) $1,010,000 Less: Cost of goods sold 690,000 Gross margin 320,000 Operating expenses 400,000 (includes $55,000 of fixed costs) Operating income -$80,000 Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. What is the budgeted operating income for March 2018

February Kaizen Budgeted Operating income -$ 69,650

March Kaizen Budgeted Operating income-$ 59,405.5

Explanation:

The Kaizen costing primarily focuses on production processes and in it the cost reductions are obtained through increasing efficiency.

Sales (168,000 units) $1,010,000

Less: Cost of goods sold 690,000

Gross margin 320,000

Operating expenses 400,000 (includes $55,000 of fixed costs)

Operating income -$80,000

Calculations For February

Decrease by 1% of COGS  $ 690,000= $ 690,000-$6900=$ 683,100

Decrease by 1% of Variable Expenses $ 345000= $ 345000-3450= $ 341550

Budgeted Operating Income Under Kaizen Costing For February

Sales (168,000 units) $1,010,000

Less: Cost of goods sold 683,100

Gross margin 326,900

Operating expenses

Variable Expenses $ 341550

Fixed Costs $55,000

Operating income -$ 69,650

Calculations For March

Decrease by 1% of COGS  $ 683,100= $ 683,100-$6831=$ 676,269

Decrease by 1% of Variable Expenses $ 341 550= $ 341550-3415.5= $ 338134.5

Budgeted Operating Income Under Kaizen Costing For March

Sales (168,000 units) $1,010,000

Less: Cost of goods sold $ 676,269

Gross margin 333,731

Operating expenses

Variable Expenses $ 338134.5

Fixed Costs $55,000

Operating income -$ 59,405.5