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
1 answer:
Answer:
If Victory decides to upgrade, the operating income increase by $20,000
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
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