Route Two Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Route Two sells 500 units per month at a sales price of $300.The company believes that it can increase the price if the tire quality is upgraded.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 25%.The CEO wishes to increase the company's operating income by 30%.Which sales price level would give the desired results? (Round your answer to the nearest cent.)

Question

Quizplus · Accepted Answer

To achieve a 30% increase in operating income, the new sales price must cover the increased variable and fixed costs while providing the desired profit. Calculating the new fixed costs as $37,500 (a 25% increase from $30,000) and the new variable cost as $230 per unit, the new sales price must be $331 per unit to achieve the desired operating income increase.

Route Two Tire Company Makes a Special Kind of Racing