Question

Route Two Tire Company makes a special kind of racing tire. Variable costs are

$ 200$200

per​ unit, and fixed costs are

$ 32 comma 000$32,000

per month. Route Two sells

400400

units per month at a sales price of

$ 320$320.

The company believes that it can increase the price if the tire quality is upgraded. If​ so, the variable cost will increase to

$ 230$230

per​ unit, and the fixed costs will rise by

5050​%.

The CEO wishes to increase the​ company's operating income by

1515​%.

Which sales price level would give the desired​ results? (Round your answer to the nearest​ cent.)

A.

$ 1 comma 056.00$1,056.00

per unit

B.

$ 280.00$280.00

per unit

C.

$ 396.00$396.00

per unit

D.

$ 360.00$360.00

per unit

Answer 1

Sales (400 units * $320)	$128,000
Variable cost (400 units * $200)	$80,000
Fixed cost	$32,000
Operating income	$16,000

Operating income = $16,000

Operating income increases by 15% = $16,000 * 1.15

= $18,400

New Variable cost = (400 units * $230)

= $92,000

New Fixed cost = $32,000 * 1.50

= $48,000

New sales = Operating income + new variable cost + new fixed costs

= $18,400 + $92,000 + $48,000

= $158,400

Sales price = (Sales price / units)

= $158,400 / 400 units

= $396.00