Question

Kariya's Kite Company produces and sells custom-made kites to children in her area. Data concerning the kites appear below:

	Per Unit			Percent of Sales
Selling price	$	150			100	%
Variable expenses		90			60	%
Contribution margin	$	60			40	%

Kariya's Kite Company is currently selling 6,500 units (kites) per month. Fixed expenses are $193,000 per month. The marketing manager believes that a $5,400 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales. What should be the overall effect on Kariya's Kite Company's monthly net operating income of this change?

rev: 03_09_2018_QC_CS-121313, 02_13_2019_QC_CS-158424

Multiple Choice

• increase of $1,800

• increase of $7,200

• decrease of $5,400

• decrease of $1,800

Answer 1

	Current	Proposed
Unit Sales	6500	(6500+120)=6620
Sales	(6500*150)=975,000	(6620*150)=993,000
Variable expenses	(6500*90)=585,000	(6620*90)=595,800
Contribution margin	390,000	397200
Fixed expenses	193,000	(193,000+5400)=198400
Net operating income	197,000	198800

Hence increase in Net operating income=(198800-197000)=$1800.