Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victory sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe that they can boost the price. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. What price level would give the desired results?

Question

Quizplus · Accepted Answer

To achieve a 25% increase in operational income, calculate the current income and then determine the new price needed. Current income is (500 units * ($300 - $220)) - $30,000 = $10,000. A 25% increase is $12,500. With new costs, fixed costs are $45,000 and variable costs are $230. To find the new price: ($12,500 + $45,000) / 500 + $230 = $345.

Victory Company Makes a Special Kind of Racing Tire