Use the following information to answer questions 3 through 6 below.

Arif would like to develop a better understanding of the factors that explain why the actual profits of $9,200 were much lower than the expected profit under the original budget. After further investigation, he concluded that the sales volume 36,000 cups higher than originally budgeted was driven by two separate factors:

• Ken increased spending on marketing and promotions (a component of selling and administrative expense) by $52,000 to generate more sales. Arif believes that increased spending on marketing accounted for an increase in sales volume of 21,000 cups.
• Ken switched to Fair Trade certified coffee for 2019 to make Caf Java more appealing to a broader, more socially conscious market. Arif believes that this change accounted for an increase in sales volume of 15,000 cups. The higher cost of Fair-Trade coffee increased the expected variable cost of goods sold to $2.10 per cup (versus the originally expected variable cost of $2.00 per cup). In addition, there were fixed costs of $30,000 to draft, monitor and administer the Fair-Trade coffee contract, and this $30,000 cost was included in selling and administrative expense.

1. Starting from the original (static) budgeted amounts, calculate the expected incremental effect of the $52,000 increase in spending on marketing on a) operating income, and b) gross margin percentage based on Arif's assumption that this spending increase resulted in an increase in sales volume of 21,000 cups. For this question, consider only the effect of the first factor, the increase in spending on marketing and promotions. (5 points)

1. Calculate the expected incremental effect on a) operating income, and b) gross margin percentage of the increased spending on marketing together with the switch to Fair Trade coffee based on the information provided above. (6 points)

1. In question 3, you calculated the expected effect of the increase in spending on marketing and in question 4, you calculated the expected effect of the increase in spending on marketing combined with the effects of the switch to Fair Trade coffee. Use those answers to calculate the expected effect on operating income of the switch to Fair Trade coffee incremental to the increase in spending on marketing. (2 points)

1. List and explain the various components of the total static budget variance for operating income to Arif. Specifically, how much of the variance is due to the decision to increase marketing spending, how much is due to the decision to switch to Fair Trade coffee, and what other component (or components) is left to be explained by further investigation? (4 points)