Victory Company makes a special kind of racing tyre. Variable costs are $220, and fixed costs are
$30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tyre, they believe they can boost the price to $342. If so, the variable cost will go up to
$230 and the fixed costs will rise by 50%. The CEO wishes to increase his profit by 25%. If Victory decides to upgrade the product according to the data above, the CEO will reach his goal.

Question

Quizplus · Accepted Answer

To determine if the CEO will reach his goal, we need to calculate the profit before and after the upgrade. Before the upgrade, profit is (500 units * ($300 - $220)) - $30,000 = $10,000. After the upgrade, profit is (500 units * ($342 - $230)) - ($30,000 * 1.5) = $9,000. The CEO's goal is to increase profit by 25%, which would require a profit of $12,500. Since $9,000 is less than $12,500, the CEO will not reach his goal.

Victory Company Makes a Special Kind of Racing Tyre