Victory Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $10,000 per month.Victory sells 700 units per month at a sales price of $310.If the quality of the tire is upgraded,the company believes it can increase the sales price to $350.If so,the variable cost will increase to $230 per unit,and the fixed costs will remain the same.If Victory decides to upgrade,how will it affect operating income?

Question

Quizplus · Accepted Answer

Current operating income = (sales price - variable cost) * number of units - fixed costs
= (310-220) * 700 - 10,000 = $83,000

New operating income = (sales price - variable cost) * number of units - fixed costs
= (350-230) * 700 - 10,000 = $112,000

The difference in operating income between the current and new scenarios is $112,000 - $83,000 = $29,000, which is an increase of $29,000. Therefore, the operating income will increase by $21,000.

Victory Tire Company Makes a Special Kind of Racing Tire