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 up to $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%. If Victory decides to upgrade, how will it affect operational income?

Question

Quizplus · Accepted Answer

D) Calculations:
(500 × $300) - (500 × $220) - $30,000 = $10,000
(500 × $325) - (500 × $230) - ($30,000 × 140%) = $5,500
$5,500 - $10,000 = ($4,500)

Victory Company Makes a Special Kind of Racing Tire