Wing Company makes a special kind of racing tire.Variable costs are $340,and fixed costs are $35,500 per month.Wing sells 620 units per month at a sales price of $400.If Wing upgrades the quality of the tire,management believes that the sales price can be increased to $450.If so,the variable cost will increase to $370,and the fixed costs will rise by 30%.The CEO wishes to increase his operating income by 20%.If the company decides to upgrade the product,the CEO will reach his goal.

Question

Quizplus · Accepted Answer

To determine if the CEO's goal of increasing operating income by 20% can be achieved with the upgrade, we need to calculate the current and projected operating incomes and compare the change.Current situation:- Sales (620 units at $400 each) = $248,000- Variable costs (620 units at $340 each) = $210,800- Fixed costs = $35,500- Operating income = Sales - Variable costs - Fixed costs = $248,000 - $210,800 - $35,500 = $1,700Upgraded product:- New sales price = $450- New variable cost per unit = $370- Increase in fixed costs = 30% of $35,500 = $10,650; New fixed costs = $35,500 + $10,650 = $46,150- Sales (620 units at $450 each) = $279,000- Variable costs (620 units at $370 each) = $229,400- Operating income = Sales - Variable costs - Fixed costs = $279,000 - $229,400 - $46,150 = $3,450The calculation of the current operating income appears to be incorrect, leading to a misunderstanding of the impact of the upgrade on achieving the CEO's goal. The correct calculation should involve accurately determining the current and projected operating incomes to assess the percentage increase.

Wing Company Makes a Special Kind of Racing Tire