Victory Company makes a special kind of racing tire. 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 tire, 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 operational income by 25%. If Victory decides to upgrade the product according to the data above, the CEO will reach his goal.

Question

Quizplus · Accepted Answer

Calculations:
(500 × $300) - (500 × $220) - $30,000 = $10,000
(500 × $342) - (500 × $230) - ($30,000 × 150%) = $11,000
$11,000/$10,000 = 110%

Victory Company Makes a Special Kind of Racing Tire