Question

Mickey Tire Company makes a special kind of racing tire. Variable costs are $ 240 per​ unit, and fixed costs are $ 25 comma 000 per month. Mickey sells 400 units per month at a sales price of $ 315. If the quality of the tire is​ upgraded, the company believes it can increase the sales price to $ 400. If​ so, the variable cost will increase to $ 300 per​ unit, and the fixed costs will rise by 40​%. If Mickey decides to​ upgrade, how will operating income be​ affected? A. Operating income will decrease by $ 10 comma 000. B. Operating income will decrease by $ 24 comma 000. C. Operating income will increase by $ 24 comma 000. D. Operating income will remain the same.

Answer 1

D. Operating Income will remain the same.

Step-by-step explanation:

Change in Operating Income = Current Operating Income - Revised Operating Income

Current Operating Income = Sales - Variable Cost - Fixed Cost

Current Sales = $315 X 400 units = $126,000

Variable Cost = $240 X 400 units = $96,000

Fixed Cost = $25,000

Current Operating Income = $126,000 - $96,000 - $25,000 = $5,000

Revised Operating Income = Revised Sales - Revised Variable Cost - Revised Fixed Cost

Revised Sales = $400 X 400 units = $160,000

Revised Variable Costs = $300 X 400 units = $120,000

Revised Fixed Cost = $25,000 + 40% of $25,000 = $25,000 + $10,000

= $35,000

Revised Operating Income = $160,000 - $120,000 - $35,000 = $5,000

Change in operating Income = $5000 - $5000 = $0

Correct option is D. Operating Income will remain the same.