Question

Mickey Tire Company makes a special kind of racing tire. Variable costs are $230 per unit, and fixed costs are $20,000 per month. Mickey sells 300 units per month at a sales price of $350. If the quality of the tire is upgraded, the company believes it can increase the sales price to $380. If so, the variable cost will increase to $250 per unit, and the fixed costs will rise by 15%. If Mickey decides to upgrade, how will operating income be affected?

A)	Operating income will increase by $6000.

B)	Operating income will decrease by $3000.

C)	Operating income will decrease by $6000.

D)	Operating income will remain the same.

Answer 1

Operating Income before upgradation:

Particulars	Amount($)
Sales(300*350)	105000
Less:
Variable costs(300*230)	69000
Contribution	36000
Less:
Fixed Costs	20000
Operating Income	16000

Operating Income after Upgradation:

Particulars	Amount($)
Sales(300*380)	114000
Less:
Variable costs(300*250)	75000
Contribution	39000
Less:
Fixed Costs	23000
Operating Income	16000

The operating Income has not Increased nor Decreased rather remained Same.

Option D. Operating income will remain the same