Use the same information as in Question 6.

The sales manager is convinced that a $5,400 increase in the monthly advertising budget would increase total sales by $18,000.

What would be the effect on net operating income?

Question

Use the same information as in Question 6.

The sales manager is convinced that a $5,400 increase in the monthly advertising budget would increase total sales by $18,000.

What would be the effect on net operating income?

BlackTom AI · Accepted Answer

Contribution margin ratio = 40%, so the additional $18,000 of sales will produce an extra contribution margin of 18,000 × 0.40 = 7,200.

Relevant concepts:
- Contribution margin (sales − variable costs) shows how much of each sales dollar contributes to covering fixed costs and then to profit.
- A change in fixed advertising is subtracted directly from net operating income; an increase in sales increases contribution margin by sales × contribution-margin ratio.
- Net operating income change = increase in contribution margin − increase in fixed advertising expense.

Step-by-step reasoning and calculations:
1. From the prior information (Question 6) the contribution margin ratio is 40%. This means 40 cents of every additional sales dollar contribute toward covering fixed costs and profit.
2. Compute the additional contribution margin from the $18,000 sales increase:
   18,000 × 0.40 = 7,200.
3. Subtract the increase in advertising (a fixed expense) from that additional contribution:
   7,200 − 5,400 = 1,800.
4. The result is a $1,800 increase in net operating income.

Why the correct answer is correct:
- The $18,000 sales boost does not all become profit; only the contribution margin portion (40% or $7,200) affects profit before fixed-cost changes. After paying the extra $5,400 advertising, the net benefit is $1,800.

Why the other choices are incorrect:
- “Decrease by $5,400”: would apply only if sales produced no additional contribution (contribution margin 0%), which contradicts the given CM ratio.
- “Increase by $5,400”: would be correct only if the entire $18,000 were profit (100% contribution margin), which is not the case.
- “Decrease by $1,800”: would imply the extra sales reduced contribution (or advertising exceeded contribution by a larger amount); here contribution exceeds the ad increase.

Conclusion: Net operating income would increase by $1,800, matching the provided answer.

Use the same information as in Question 6. The sales manager is convinced that a $5,400 increase in the monthly advertising budget would increase total sales by $18,000. What would be the effect on net operating income?单项选择题

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