Question

Victory Tire Company makes a special kind of racing tire. Variable costs are $ 220 per​ unit, and fixed costs are $ 20 comma 000 per month. Victory sells 500 units per month at a sales price of $ 310. If the quality of the tire is​ upgraded, the company believes it can increase the sales price to $ 360. If​ so, the variable cost will increase to $ 230 per​ unit, and the fixed costs will remain the same. If Victory decides to​ upgrade, how will it affect operating​ income

Answer 1

If Victory decides to​ upgrade, the operating​ income increase by $20,000

Step-by-step explanation:

For calculating the affect of operating income between two unit levels, the computation of operating income is important.

Steps given for calculating the operating income is given below:

Step 1 : First we have to compute contribution to arrive net operating income .

So, contribution = Sales revenue - variable cost.

Step 2 : Now, the computation of operating income is easy.

Because the operating income is an amount which is come from subtracting fixed cost from contribution.

So, Operating income = Contribution margin - Fixed cost

The computation of both levels is given in the attachment sheet.

Thus, If Victory decides to​ upgrade, the operating​ income increase by $20,000