Victory Company makes a special kind of racing tyre.Variable costs are $200 and fixed costs are $40,000 per month.Victor sells 600 units per month at a price of $320.If Victory upgrades the quality of the tyre,they believe they can boost the price up to $350.If so,the variable cost will go up to $240 and the fixed costs will rise by 50%.If Victory decides to upgrade,how will it affect operating profit?

Question

Quizplus · Accepted Answer

Current:

Revenue = 600 x $320 = $192,000
Variable costs = 600 x $200 = $120,000
Fixed costs = $40,000
Operating profit = $192,000 - $120,000 - $40,000 = $32,000

If they upgrade:

Revenue = 600 x $350 = $210,000
Variable costs = 600 x $240 = $144,000
Fixed costs = $40,000 x 1.5 = $60,000
Operating profit = $210,000 - $144,000 - $60,000 = $6,000

Therefore, operating profit will go down by $26,000 (Option C).

Victory Company Makes a Special Kind of Racing Tyre